Are Xero shares a must-buy for investors?

Xero Ltd (ASX: XRO) shares have fallen a staggering 62% over the past 12 months.

That is a remarkable decline for a technology company that has spent years building one of the world’s leading small business accounting platforms.

Could this make Xero shares a must-buy for patient investors?

An enormous market opportunity

The first thing that stands out to me is just how much room Xero still has to grow.

The company finished FY26 with 4.92 million customers globally, having added another 506,000 during the year. By July, it had reached the 5 million customer milestone.

That is an impressive achievement, but it is still a relatively small share of its potential market.

Xero estimates that its total addressable market includes around 100 million small and medium-sized businesses globally.

Of course, I would not expect the company to capture anything close to that entire market. Competition is fierce, and small businesses have different accounting requirements. But it gives investors a sense of the opportunity.

Overall, I think there is plenty of scope for Xero to keep adding customers for many years.

Getting more value from existing customers

Xero has been steadily increasing the amount of revenue it generates from each customer.

In FY26, average monthly revenue per customer increased 23% to NZ$55.44, although the addition of payments business Melio contributed to that growth.

Even excluding Melio, average revenue per customer increased, demonstrating that Xero is finding ways to generate more revenue from its existing platform.

I think that trend can continue. Xero is increasingly offering services beyond traditional bookkeeping, including payroll, payments, cash flow management, and other financial tools.

The acquisition of Melio gives it a stronger position in business payments, particularly in the United States.

As customers adopt more of these services, Xero can potentially generate additional revenue without needing to win a completely new subscriber.

That combination of customer growth and higher average revenue per customer could be powerful over time.

What about the AI threat?

This is probably the biggest question I have about Xero’s future.

Artificial intelligence (AI) is developing quickly, and it is not difficult to imagine a future where somebody asks ChatGPT to help prepare their tax return or manage parts of their business finances.

Could that eventually reduce the need for traditional accounting software? I certainly would not dismiss the possibility.

But I think Xero has some important advantages. Accounting involves much more than answering financial questions. Businesses need accurate records, bank reconciliations, payroll compliance, tax reporting, and reliable information that can be shared with accountants and regulators.

Xero brings those processes together, with years of financial information often embedded in the platform.

That makes switching software a significant undertaking, particularly for businesses that rely on Xero every day.

The company is also developing its own AI capabilities through JAX, which aims to automate bookkeeping tasks and help customers manage their finances more efficiently.

I think that gives Xero an opportunity to benefit from AI rather than simply defend itself against it.

The challenge will be making sure its software continues providing enough value as AI tools become more capable.

Foolish takeaway

I think Xero is still one of the ASX shares I would most want to own for the long term.

The 62% share price fall is certainly concerning, and AI could change the accounting software industry considerably.

But with millions of potential customers still to reach and opportunities to generate more revenue from those already using its platform, I believe Xero has plenty of growth ahead.

For me, that makes the shares a buy today.

The post Are Xero shares a must-buy for investors? appeared first on The Motley Fool Australia.

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Motley Fool contributor Grace Alvino 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.