Xero crashes 14% to a multi-year low. What on earth is going on?

Xero Ltd (ASX: XRO) shares have been absolutely smashed.

The cloud accounting software company’s share price has plunged 13.95% to $82.69, marking a fresh multi-year low. In early trade today, the stock briefly fell as low as $81.81.

To put this move into context, Xero has not traded at these levels since early March 2023.

For a company once valued close to $200 per share, this sell-off has been absolutely brutal.

Let’s dive right in and see what’s driving the fall.

Tech stocks are being hit hard

The biggest factor behind Xero’s plunge is not company-specific news.

Instead, the sell-off is being driven by a major slump across the technology sector. The S&P/ASX All Technology Index (ASX: XIJ) is down a mammoth 7.77%, reflecting heavy selling across ASX tech stocks.

Investors are growing increasingly nervous about artificial intelligence disruption. There is a fear that rapid advances in AI could undermine traditional software businesses by automating tasks faster and cheaper than existing platforms.

That concern has triggered sharp declines in technology stocks globally, particularly companies that rely on subscription software revenue.

This creates a challenge for Xero because, while it is a high-quality business, it is also a premium-priced software company.

Some market participants worry that AI-driven accounting tools could, over time, reduce the need for traditional accounting software. As a result, investors appear to be de-risking and moving money away from tech stocks until there is more clarity.

What the latest update showed

Earlier this week, Xero released an investor briefing outlining its growth strategy.

Management highlighted strong long-term opportunities from artificial intelligence, as well as continued expansion in the United States following its acquisition of Melio.

However, the company also acknowledged that Melio is not expected to reach adjusted EBITDA breakeven on a run-rate basis until the second half of FY28.

What brokers are saying

Despite the sell-off, many analysts remain positive on Xero’s long-term outlook.

Macquarie has retained an outperform rating and recently raised its price target to around $234 per share, citing Xero’s strong competitive position and long-term growth potential.

Jefferies is more cautious, cutting its price target to about $101 due to margin pressure and the slower path to profitability from the Melio acquisition. Even so, that target still sits above the current share price.

Overall, brokers largely agree that the sell-off reflects tech-sector fear rather than a collapse in Xero’s fundamentals, with long-term growth drivers still intact.

Foolish Takeaway

Xero’s fall highlights how quickly sentiment can turn against premium-priced technology stocks.

While AI fears are driving much of the selling, investors want clearer proof that Xero can turn growth into profits. Until then, volatility is likely to remain elevated.

The post Xero crashes 14% to a multi-year low. What on earth is going on? appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras 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 Jefferies Financial Group, Macquarie Group, and Xero. The Motley Fool Australia has positions in and has recommended Macquarie Group and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.