Xero Will Thrive as AI Becomes a Friend Rather than a Foe

Concerns over the quality and moats of SaaS businesses in the face of new AI threats will pressure Xero to demonstrate greater near term profitability, even if that sacrifices some long term growth ambition.

This change will likely benefit Xero more than its current competitors as, like the Warren Buffett quote, "Only when the tide goes out do you discover who's been swimming naked". The pressure of AI means every SaaS company has to prove the very high P/E ratios attached to them are worthwhile. Xero has healthy revenue growth, healthy margins and healthy cashflows. Having the opportunity to demonstrate this over its shakier SaaS rivals should boost Xero in the long run.

AI is unlikely to be the death knell to Xero that some expect it to be, largely because Xero is exactly the kind of company that the 'hyperscaler' AI firms are looking to sell their products to in order to boost efficiency! This will help Xero innovate faster and with lower R&D spend per meaningful update. Unlike bigger rivals, such as SAP, Xero's typical customer is not of sufficient size that they would look to use AI coding tools to build their own in-house solution. Instead, they will look to Xero and its 3rd party app ecosystem to find whatever solution they need that already integrates with Xero. AI tools making coding more accessible increases the likelihood that someone else has already made just the plug-in the customer needs available through that ecosystem.

AI tools and innovations are very much still a work in progress though, and accounting software demands very high trust in information accuracy and availability. Xero must be careful not forget this when adjusting to the new AI-enabled way of working; an AI tool hallucinating a 5th quarter of sales in the year, or hiding expense categories because it thinks they look bad would be completely unacceptable to customers and break the trust Xero has worked so hard to build. Concentration of cloud storage providers means Xero must be extra careful to ensure its platform remain available at all times as well.