I Don’t Believe Xero Has a Moat in an AI World — Here’s Why

People talk about Xero’s “moat” like it’s built out of compliance, accountants, and bank feeds. But when you look at what AI can already do today, the moat isn’t deep. It’s barely a puddle.

I’ve been pushing my AI (I call her Sarah) on this topic for a while. At first she thought Xero had 10–15 years. After more questions, that dropped to 5–8. Then I asked: “What about a smart PhD student who understands AI?” Suddenly the timeline for a cheap, fully‑functional competitor was 6–9 months. That’s when it became obvious: the moat isn’t real.

The SME Can Already Lodge Their Own BAS

This is the part nobody wants to say out loud. SMEs already have the legal right to lodge their own BAS. If an AI engine prepares it, the SME can lodge it. No certification. No accountant. No dependency on Xero. Once you accept that, the “compliance moat” disappears.

Bank Feeds and Compliance Aren’t Moats

Platforms already bot their way into bank data. Open banking is accelerating. And AI doesn’t even need structured feeds — it can read statements, emails, PDFs, photos, anything. Compliance logic isn’t a moat either. It’s rules. AI reads the tax code, rulings, thresholds, awards, and edge cases faster than any human. What accountants used to sell as expertise is now computation.

Accountants Were the Real Moat — and AI Eats That First

SMEs don’t choose Xero. Accountants choose Xero for them. If AI replaces 80–90% of what accountants do — and it already can — the accountant is no longer the gatekeeper. Remove the accountant and the SME is free to choose the cheapest, smartest tool.

AI Can Build the Competitor

With good direction, AI can write the ingestion pipelines, classification logic, compliance engine, reporting layer, and conversational interface. A small team — or even one sharp engineer — could build an AI‑native accounting platform in six months. AI writes most of the code. Humans just steer it.

Final Thought

Given AI can now build AI, the real challenge isn’t technology — it’s adoption. But word spreads fast: “My accounting costs $50 a year, does everything, and answers questions 24/7.” At that point it’s just a marketing problem, and AI’s good at those too.

Food for thought. Challenge it. I could be wrong. But I wouldn’t want to be an accountant right now or worse still, learning to be one.

MARKET RELEASE Melio and Xero Product Demonstration and Education Session WELLINGTON.

Xero Limited (ASX: XRO) is pleased to announce a virtual briefing session to be hosted by Xero and Melio executives on 3rd February 2026 at 10.30am AEDT.

This session will include Melio and Xero product demonstrations and education sessions for investors and analysts followed by a live Question and Answer session.

Pre-registration for this event is encouraged at: https://webcast.openbriefing.com/xro-ann-2026/. A replay of the webcast will be available on Xero’s Investor Centre: www.xero.com/about/investors 

Discl: Held IRL 5.23%

Following the on-market purchases of XRO Directors David Thodey and Mark Cross on 18 Nov 2025, Dale Murray has also made a sizeable on-market purchase last week.

She topped up her holdings by ~90% costing $148.2k, investing 50% more than the ~$100k top up from David and Mark, each.

Sure feels like a Board confidence signaling exercise

The recent straws on XRO have prompted this post. I sold Xero around the cap raise after being a v long-term holder.

Why Sell?

• I have no way of researching the US SME market—no ability to conduct on-the-ground customer research or evaluate “excitement” about the product. I have to rely on company reports and trust management on their progress and vision.
• The US is not one country and is not an easy place to penetrate. I personally think of the US as at least 10 different countries, more akin to a version of Europe. States and regions have their own laws, culture, and ways of doing business. This makes it tough for a business like Xero to establish a foothold, as every state requires a somewhat nuanced product.
• Intuit is established and entrenched. Is Xero’s product different enough or suitable for a niche that isn’t currently well served? Does Melio kickstart Xero? I have no idea.
• I also think Intuit will fight back if Xero starts making inroads in the US. The price war and advertising blitz that occurred in Australia around the time Xero entered the US, I admit is a long bow, but the timing was interesting.

My bias:

During its growth phase in Australia, Xero was a ridiculously easy company to research and to verify customer uptake. Non-financial SMEs “raved” about the product. It was easy to see why—the platform was intuitive compared to MYOB, and it made life much easier for SMEs whose bane of existence is paperwork.

There were many incidental moments that reinforced Xero as a strong platform. For example, a friend who runs a restaurant talking about the time-saving and accuracy from photographing invoices and having them auto-upload, or the first time a tradie pulled out their phone and sent an invoice on the spot.

So my question to the SM community is: how do you do on-the-ground style research to verify your US Xero investment case from afar?

Perhaps my bias and experience from holding XRO through the Australian growth phase is blinkering me.

I’m watching from the sidelines for now.

Interesting article titled "Why Xero won Australia, but will struggle in America"

Well worth a read for those owning and looking to own while the stock is correcting.

https://www.livewiremarkets.com/wires/why-xero-won-australia-but-will-struggle-in-america

Discl: Held IRL 6.44%

Good to see both David Thodey and Mark Cross stumped up ~$100k of their own coin to buy into the XRO dip yesterday. 

Given the similar amounts, it does have the look of a Board confidence signaling exercise. Be interesting to see what the other directors end up buying and when to confirm.

Petty cash for these guys for sure, but its more coin that I have, so it works for me ...

SaaS SMB accounting and payments platform $XRO reported their 1H FY26 Results today.

ASX Announcement

I might have said that the SP reaction of -9% on the day surprised me (in truth it did), but as a long term holder of this super highly-rated growth stock, you have to expect that anything much short of perfection gets punished, and the effect was amplified by today's marco data hitting several tech stocks (doubts on further interest rate cuts in light of strong October employment numbers).

However, before diving into the details, there are some contextual issues that set-up an adverse reaction, IMHO:

• Acquisition of Melio - many think this is a return to over-paying for material acquisitions that don't deliver the strategic intent. Senitment around this has dragged the SP from a high of $195 in June to a near 18-month low at the close today of $127.
• G&A lept up a whopping 48% driven by accounting treatment of Sukhinder's large remuneration package, which almost got voted down at the AGM. The official explanation is: "primarily due to higher executive personnel costs associated with the accounting treatment of option and sign on equity grants announced last year. The majority of these noncash costs are not expected to recur in fiscal '27."
• While Subscriber additions in North America were strong (+15% to pcp) , revenue growth was relatively weak at +18% on CC. With a welcome breakout of US data (for future reporting with Melio) we can see that Canada is pretty anaemic - but we know that as the economy is hurting as a result of the Trump tariffs. Quelle surprise.
• There is some ongoing concern about the level of development spend being capitalised, at 47%
• Finally, while there are limited numbers around for the 1H consensus, there are reports that EPS missed consensus by 13%.

I attended the analyst call and have sliced and diced the results in detail. Overall, I'm pretty happy.

So much so, that for the first time in ages, I have acquired more $XRO stock today just before the close, adding to my less-than-well-timed purchase yesterday. (Important context is that going in to today's result, the SP was already 28% below the TP consensus, although I think some of the analysts have lost the plot with their lofy targets, which run as high as $230!)

My Highlights

For me there are several highlights:

• CEO reiterated the target to double revenue from FY25 to FY28
• Revenue was up 20% YoY (+18% CC) driven by Subscribers +10 YoY and ARPU +8% YoY (CC)
• Reiteration of capital discipline, with the FY26 Opex Ratio upgraded from 71.5% to 70.5% (including Melio)
• CEO said Melio acquisition is performing above expectionations, and Xero will launch the US payments in $XRO in December.
• Australia performed strongly, with subs +9% to PCP, and revenue +19% in CC.
• UK performed very strongly (IMO given the macro), with subs +13% and revenue +20% in CC.
• Looking past the "one-off" G&A blowout, both S&M and R&D continued to decline as a % of revenue: -0.3pp and -0.5pp respectively. This should give confidence about continuing the operating leverage recent track record.
• Cash Generation was strong, with FCF up 54% to NZ$321m from NZ$209m in the pcp, alebit flattered by interest earned on cash raised for the Melio acquisition and a weak NZD, but strong nonetheless.
• AMRR was also up strongly +26% yoy (albeit only +19% in CC, again because of the weak NZD)
• While Monthly Churn was up slightly to 1.09%, this remains below the long-term pre-pandemic level of 1.15%
• LTV was up 9% in 6 months from $17.95bn to $19.56bn, albeit only $18.52 (+3%) if we back out the FX benefit.
• LTV/CAC weakened again in ANZ to 10.7 from 11.6 in March, explained as being due to chasing customers via the direct channel, where churn is higher for small customers who try the platform out for a few months and decide not to adopt. International stayed steady at the much lower LTV/CAC of 3.3.

My Assessment

Across the board, the results were strong. Yes, there are pockets of relative strength and weakness, if you dig deeper, but overall there is nothing that gives me concern or is surprising.

One orange flag is the need to keep an eye on the ANZ LTV/CAC trend, but this value has been so high for so long, you can argue on economic grounds that they have been underinvesting in the home markets on customer acquisition. Good to see International is stable at the less healthy 3.3, marking the more competitive international markets.

The long term target of doubling revenue by FY28, restated today confidently by Sukhinder, requires a revenue CAGR of 26% or 21% depending on how you measure it. If measured from $XRO's FY25 results of NZ$2.1bn to NZ4.2bn, a 26% CAGR is required. Alternatively, if you start from the pro forma Melio+$XRO combination of NZ$2.36bn, then the actual required organic CAGR is 21%).

This must be achieved while continuing to drive operating leverage. Both CEO and CFO are clear about that.

Clearly, that means that management are confident that Melio is going to transform and accelerate prospects in the US market.

$XRO has a focused strategy: the 3x3 of Accounting, Payments and Payroll across ANZ, UK and North America. Melio and the inegration of Gusto, gives the US business the full offering, with opportunities to sell Melio into $XRO's existing customers, and $XRO into Melio's customers, with a combined saleforce ready to go.

Sukhinder presented a clear US Pro Forma set of financials, and so the US will now be reported separately, with Canada absorbed into International. Yay! The key slide follows.

And so, we will be able to judge progress over the next couple of reports. And given Sukhinder's eye-watering compensation package, I think there will be little tolerance for mis-steps. I guess she knows that. Melio is quite clearly her "big bet" that she can awaken the US Dog that (so far) Hasn't Barked.

And that really is the big unanswered question and one that is worth a lot more than the upfront US$2,5bn paid for Melio. I say that because while ANZ and the UK are solid (with the latter still containing a long runway ahead), those two markets on their own do not justify $XRO's A$23bn market cap. At some point, there has to be an acceleration in North America. And Sukhinder has clearly rolled the dice with Melio. I'm happy she's done that, and Melio looks like a good pick.

Valuation

As I have put more of my RL portfolio into SM, I realise I've never posted my own valuation here for $XRO. And I haven't updated the model for the Melio pro forma FY25 starting point as yet.

So, as a starting point, I am putting in numbers for $XRO pre-acquisition, with simple assumption of organic annual revenue growth of 21% p,a to FY28, Opex Expense Ratio declining to 69% in FY28, $GM to 90% by FY28. (Discount Rate 10%; Tax 30%; SOI gwor at 1.1%)

While the low %GM Melio business messes this up, I am assuming that the Melio acquisition is value neutral, save for the fact that it enables $XRO to sustain revenue growth of 21% pa, with improving operating leverage out for 3 years.

The following table shows the results for this valuation (A$ shown):

I've chosen P/E's of 50, 60 and 70 because in FY28, the growth in EPS is still 26% so, the business will still likely be highly rated at that point, albeit it will have fallen significantly from recent highs!

I note that my FY28 EPS is significantly higher than this morning's analyst consensus of $3.26, so that's something to look at again once I have rebuit my valuation for the $XRO + Melio combination.

This gives my valuation for $XRO of $146 ($122 - $170) at YE FY26,

So how does this compare to the analysts? Looking to MarketScreener.com and converting NZD to AUD at 1.16, the analysts price targets have an average of $192 with a range of $96 to $231. Go figure.

Invesment Decision

Even though my valuation hasn't properly modelled the impact of Melio, I am a great believer that M&A rarely adds value on its own. The long term value comes fom how it transforms the organic economic engine. The above valuation is an upgrade to my numbers from the FY25 results, driven by my belief that Melio will transform $XRO's underweight US offering,

With the SP today falling to $127, $XRO has fallen to the lower end of my range, and therefore I am happy to top up, given that the midpoint of my range would deliver a 15% return in 6 months.

So, if Sukhinder is right, and Melio transfroms progress in the US, and ANZ and UK keep doing their thing, then today the market has offered me a chance to top up on one of my longest held ASX stocks (first held in 9-Sept-16).

I've been happy to take that opportunity, increasing my RL holding today and yesterday from 5.5% to 7.8%.