Why did the Xero share price take such a beating on Wednesday?

Two more years before Xero can try to cash in on this legislation…

| More on:
concerned and worried man looking at computer and monitoring falling share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The Xero share price finished 3.3% lower today following reports of a delay to an adoption driver
  • His Majesty's Revenue and Customs (HMRC) has delayed Making Tax Digital for income tax self-assessments to April 2026
  • The United Kingdom is Xero's second-largest market, behind Australia, based on revenue

The Xero Limited (ASX: XRO) share price languished today despite a broadly positive session for Australian shares.

Investors in the cloud-based accounting software provider might find some solace in the fact that they're not alone — misery loves company, right? Other notable ASX tech shares that experienced weakness today include Link Administration Holdings Ltd (ASX: LNK) and TechnologyOne Ltd (ASX: TNE).

Though, Xero is mostly to blame for dragging the technology sector into the red. At the closing bell, Xero shares shrunk 3.3% in value to $69.29 apiece. In contrast, the S&P/ASX 200 Index (ASX: XJO) finished 0.9% higher.

Losing one of its growth engines

Xero's bottom line is treading on the cusp of profitability. This puts a greater focus on the software company's top-line growth trajectory. If revenue begins to slow, it could significantly impact the future potential earnings power of the company, and its valuation.

Yesterday afternoon, the Australian Financial Review reported on the delay to the latest phase in the United Kingdom's Making Tax Digital (MTD) initiative. Under the revised plan, the use of digital accounting for income tax self-assessment (ITSA) has been pushed back from April 2024 to April 2026.

Those earning more than £50,000 (A$87,975) will now have an additional two years to adopt an MTD-supported software solution. The change is a blow to Xero's share price and its short-term growth ambitions in its largest market outside of Australia.

The accounting software company provided the news itself via a blog three weeks ago. Within the blog, Xero shared the new-look roadmap for its major UK catalyst, the MTD rollout:

  • April 2026 — MTD for ITSA instituted for businesses, self-employed individuals, and landlords with income over £50,000
  • April 2027 — MTD for ITSA instituted for businesses, self-employed individuals, and landlords with income over £30,000

Importantly, the changes are merely a delay and not a removal of previous plans. However, the high rate of inflation puts a greater value on cash flows in the near term.

Does the Xero share price have potential?

Shareholders might be wary of slowing growth in the future. Though, Xero has been growing its cash from operations at an impressive margin for years. The question is whether there will be considerable profits to be made when the company decides to take its foot off the gas.

Two brokers that are opportunistic on the Xero share price at the moment are Citi and Bell Potter. Both currently hold a price target of $97.90 on Xero shares. That would mean investors at today's price could be looking at roughly a 42% upside.

The Xero share price is down an astonishing 45.8% over the past year.

Motley Fool contributor Mitchell Lawler 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 Link Administration and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended Technology One. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Technology Shares

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Five happy friends on their phones.
Share Market News

Goldman Sachs says these ASX tech stocks can rise 18% to 30%

The broker sees big returns on offer from these shares.

Read more »

A guy helps a girl lift a couch, both are laughing.
Technology Shares

3 of the best ASX tech shares to buy and hold until 2030

I think these stocks have exciting futures.

Read more »

A young woman uses a laptop and calculator while working from home.
Technology Shares

If I'd put $5,000 in Block shares 5 months ago, here's what I'd have now

Was it a good idea to invest in this payments stock five months ago?

Read more »

Close up of a sad young woman reading about declining share price on her phone.
Technology Shares

Why is the Brainchip share price sinking over 7% today?

What's going on with this tech stock on Wednesday?

Read more »

woman working on tablet
Technology Shares

Missed out on Nvidia? My best ASX tech stock to buy and hold

Do you have FOMO after the US chip maker's share price rocketed? Here's an Aussie company worth backing instead.

Read more »

Three businesspeople leap high with the CBD in the background.
Technology Shares

Guess which ASX small-cap stock is rocketing 45% on 'pivotal moment'

Investors have responded very positively to an announcement.

Read more »

A man looking at his laptop and thinking.
Technology Shares

Why are these ASX tech shares getting smashed today?

Owners of these two stocks are missing out today.

Read more »