I’d call Xero Ltd (ASX: XRO) one of the ASX’s top shares, partly because of its lower valuation and partly because it’s delivering excellent growth in its financials. I’ll look at both factors below.
Xero is one of the world’s largest accounting software providers. It has subscribers in numerous countries including New Zealand, Australia, the UK, the US, Canada, South Africa and Singapore.
The company has suffered from the sell-off related to the fallout of the Middle East conflict. Before that, it declined due to market fears of future AI competition.
As you can see, the market has punished Xero’s share price heavily for potential future negative effects.
I think there are two key reasons why Xero is a leading opportunity and one of the ASX’s top shares.
Much more appealing Xero share price valuation
As shown on the chart below, the Xero share price is down 53% in the past six months and it has fallen 32% in 2026 to date.
Not many S&P/ASX 300 Index (ASX: XKO) shares have fallen that much, and Xero is definitely one of the highest-quality. I’ll explain why in a moment.
But first, it’s important to see just how much Xero cheaper is now trading.
Broker UBS thinks Xero could generate net profit of NZ$225 million in FY26 and NZ$411 million by FY28. At the current valuation and exchange rates, that means the Xero share price is valued at 70x FY26’s estimated earnings and 38x FY28’s estimated earnings.
Why it’s one of the ASX’s top shares
There are very few businesses on the ASX that have grown strongly over the past 20 years, with potential to continue growing, in my view.
The company has won millions of subscribers worldwide, attracted by the efficiencies and value Xero’s offering.
There are certain statistics that show the business is appreciated by subscribers.
In the FY26 half-year result, its subscribers increased 10% year-over-year to 4.6 million. Its subscriber retention rate is around 99% each year, which is extremely high for a software as a service (SaaS) business. This shows that almost all new subscribers are additions to revenue, rather than some being needed to replace lost subscribers each year.
Additionally, as the length of time that each subscriber has been subscribed increases, that improves the long-term value of each subscriber.
In the HY26 result, Xero reported its total lifetime value (LTV) of subscribers increased 15% year over year to NZ$19.6 billion.
That high level of subscriber loyalty and appreciation has enabled Xero to regularly increase prices while still maintaining the retention rate. In HY26, the average revenue per user (ARPU) grew by 15% to NZ$49.63.
Most importantly, the company’s profitability continues to rise. In HY26, net profit grew by 42% to NZ$134.8 million and free cash flow surged 54% to NZ$321 million. This shows that the business’ actions are clearly playing out positively for profit.
I also think its global subscriber base can continue to grow, as business owners look to run their businesses better and unlock more time for themselves. I think Xero’s economic moat is stronger than the market is giving it credit for.
It’s still one of the top ASX shares in my eyes despite the worries, and the lower valuation more than makes up for the uncertainties.
The post A rare buying opportunity in 1 of the ASX’s top shares? appeared first on The Motley Fool Australia.
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Motley Fool contributor Tristan Harrison 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 Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.