Is the Xero share price too cheap to ignore?

The Xero Ltd (ASX: XRO) share price just keeps getting worse, if you're a shareholder, or is presenting an ever more compelling buying opportunity, depending on your perspective.

To be fair, the share price has recovered reasonably well from 12-month lows around $55 at the start of October, but at $69.92 at the time of writing, the stock is still 14.4% off the $81.73 it was changing hands for when the company held its annual general meeting in late August and way below the 12-month high of $145.46.

Solid outlook, yet shares on the slide

So what was the bad news which might have precipitated this decline?

Must it have been Chief Executive Officer Sukhinder Singh Cassidy's guidance for a modest 21.5% uplift in EBITDA this financial year to as much as NZ$920 million?

Or the expansion story in the US, where Ms Singh Cassidy said growth went from 13% in FY24, to 25% in FY25, to 30% in FY26.

My theory is that the company is still caught up in the idea that AI will be able to cheaply replicate software suites, leading to a race to the bottom on pricing.

I think this vastly underestimates the risk aversion associated with a software package your entire business relies on.

People who buy products like those Xero sells are paying for peace of mind as much as utility.

AI to drive growth

The company itself believes AI will be an enabler rather than a competitor, allowing it to code and ship products faster and to provide an extra layer of utility to its products.

The analyst team at Macquarie has done a deep dive on Xero and released a new research note on the company on 5 November.

The broker quickly dismisses the AI threat.

Macquarie said:

The market has priced AI as a threat to Xero's moat, but this misses where the value sits. Models are increasingly commoditised; proprietary accounting, transaction, and workflow data are not. XRO owns this context and can use it both to build its own AI products and distribute through ChatGPT, Gemini, Copilot, and others, without surrendering its data for model training.

Putting AI aside, Macquarie has compared the pricing of Xero against competitors such as QuickBooks, and said it comes in well under.

Xero, it said, has just 7% market penetration in the US, providing a long runway for growth, with Macquarie saying they saw "strong potential" for the company.

Then on the product development front, AI could increase the company's return on investment significantly, the broker said.

Macquarie has a price target of $158.50 on Xero shares, representing a 126.7% gain if achieved.

Foolish takeaway

The current share price appears to be responding to the wrong signals.

If the company's growth projections are correct, a rerating of the Xero share price seems a good bet.

The post Is the Xero share price too cheap to ignore? appeared first on The Motley Fool Australia.

Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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