UBS analyst Lucy Huang believes Xero shares have the potential for a re-rating, especially after management indicated that Melio could achieve EBITDA break-even on a run-rate basis in the second half of 2028. This timeline is approximately six to 12 months ahead of previous expectations. Xero is a software company that provides cloud-based accounting software for small businesses. Its platform offers tools for managing invoicing, bank reconciliation, bookkeeping and more.
Huang’s update on Tuesday, which included a demonstration of Xero’s AI and Melio products, has led UBS to adopt a more positive near-term outlook on the stock. The firm has reaffirmed its buy rating and set a price target of $174. UBS values Melio at $17.80 per share, highlighting that the market is undervaluing the business. Despite Xero’s faster projected growth, the stock is trading at five times its FY27 sales, which is a discount compared to its peers.
Huang anticipates that Melio’s total payment volume will increase by 40 per cent between FY26 and FY28. In addition, the planned monetisation of AI features starting in FY27 could serve as a catalyst for a broader sector re-rating. UBS research indicates that small businesses are prepared to pay approximately 8.5 per cent more for features that incorporate AI.
Despite the positive outlook from UBS, Xero experienced downward pressure on Wednesday, with its stock price falling by over 14 per cent amid a general downturn in software stocks.
