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Did Xero’s Melio Deal and Margin Pressure Just Shift Xero's (ASX:XRO) Investment Narrative?

Simply Wall St · 3d ago
  • In recent months, Xero has faced mounting scrutiny after its US$2.50 billion acquisition of U.S.-based payments platform Melio, funded by a discounted institutional placement that diluted existing shareholders, even as the company reported 20% operating revenue growth and higher EBITDA in its FY26 half-year results.
  • The key concern now is whether Xero can manage declining gross profit margins and successfully integrate Melio without eroding the benefits of its expanding cloud accounting platform.
  • We’ll now examine how ongoing worries about the Melio acquisition’s integration and margin impact could reshape Xero’s broader investment narrative.

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Xero Investment Narrative Recap

To be a Xero shareholder, you need to believe its cloud accounting platform can keep deepening its role in small business finance, even as competition stays intense and the share price has been weak. The key short term catalyst is whether Xero can show that Melio strengthens its ecosystem without further pressuring already declining gross margins, while the biggest risk is that integration challenges and dilution weigh on both financial outcomes and market confidence.

The most relevant recent announcement here is Xero’s FY26 half year result, which reported 20% operating revenue growth and higher EBITDA alongside margin pressure. Those numbers matter because they are the first real datapoint on how the Melio acquisition is landing in the financials, and they frame the debate around whether payments can support future growth without permanently impairing profitability.

Yet investors should be aware that concerns around declining gross profit margins and the Melio integration could...

Read the full narrative on Xero (it's free!)

Xero's narrative projects NZ$3.5 billion revenue and NZ$629.9 million earnings by 2028. This requires 18.1% yearly revenue growth and about NZ$402 million earnings increase from NZ$227.8 million today.

Uncover how Xero's forecasts yield a A$182.05 fair value, a 66% upside to its current price.

Exploring Other Perspectives

ASX:XRO 1-Year Stock Price Chart
ASX:XRO 1-Year Stock Price Chart

Twelve Simply Wall St Community valuations span from about A$71.79 to A$398.60 per share, reflecting very different views on Xero’s potential. Against that backdrop, the current focus on whether declining gross profit margins improve or worsen after the Melio acquisition could be central to how the company’s performance is judged over the next few years, so it is worth weighing several of these perspectives before deciding where you stand.

Explore 12 other fair value estimates on Xero - why the stock might be worth 34% less than the current price!

Build Your Own Xero Narrative

Disagree with existing narratives? Create your own in under 3 minutes - extraordinary investment returns rarely come from following the herd.

  • A great starting point for your Xero research is our analysis highlighting 2 key rewards that could impact your investment decision.
  • Our free Xero research report provides a comprehensive fundamental analysis summarized in a single visual - the Snowflake - making it easy to evaluate Xero's overall financial health at a glance.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.