Can Xero shares bounce back after crashing to a 3-year low?

Xero Ltd (ASX: XRO) shares have had a tumultuous run.

The cloud accounting software company plunged to a 3-year low of $72.26 in early trade on Friday, marking its weakest level since 2023. The stock later recovered slightly but still finished the session down 4.46% at $73.49, reflecting continued heavy selling pressure.

After once trading as high as $196.52 in June 2025, Xero's decline has been staggering, to say the least.

But after such heavy losses, can Xero shares recover from here?

Let's take a closer look.

Tech sector panic is driving the fall

Thankfully, Xero's weakness is not happening in isolation.

The S&P/ASX All Technology Index (ASX: XTX) has plunged roughly 22% over the past month, as investors reassess the outlook for technology stocks. Across the globe, markets have been rattled by concerns about the artificial intelligence (AI) disruption.

Recent media reports show Wall Street falling as the tech rout intensified on AI concerns. Investors are reassessing which industries will benefit and which may be disrupted. Software stocks have been hit particularly hard.

In the US, the S&P 500 software index has fallen sharply as investors seek clearer returns on heavy AI spending. There are growing concerns that businesses may struggle to justify large investments if productivity gains fail to materialise quickly.

Back at home, investors are starting to question Xero's long-term growth outlook. Given the stock was already trading on a premium valuation, that multiple has now compressed quickly.

What about Xero's fundamentals?

Xero recently highlighted ongoing growth opportunities in AI and its expanding US presence following the Melio acquisition. Management continues to target long-term margin expansion and subscriber growth.

Melio is not expected to reach adjusted EBITDA breakeven on a run-rate basis until the second half of FY28.

More broadly, investors are rotating away from growth stocks until there's greater clarity on how AI will affect company earnings and the economy.

What are brokers saying?

Despite the sell-off, several brokers still see significant upside.

Macquarie has retained an outperform rating and previously lifted its price target to around $234 per share. It believes Xero remains well positioned for long-term global growth.

Jefferies has taken a more cautious stance, trimming its target to roughly $101, reflecting near-term margin pressure and integration risks from Melio.

Overall, the average broker target still sits above $100, suggesting analysts believe the recent sell-off may have gone too far.

Can Xero bounce back?

History shows that high-quality software companies can recover strongly once sentiment improves. But that recovery usually requires two things. Stabilisation in the broader tech sector and strong evidence that earnings growth is accelerating.

If AI fears subside and Xero continues executing on subscriber growth, US expansion, and margin improvement, a rebound is more than likely.

The post Can Xero shares bounce back after crashing to a 3-year low? appeared first on The Motley Fool Australia.

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 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2026