But the company’s shares tumbled 9% immediately after the result.

The stock was at A$140 ($161) going into the half-year numbers on November 13, but at one point yesterday was down another 6% to below A$120.

Some are pinning the fall on investor scepticism about Xero’s A$2.5b ($4.1b) acquisition of Israeli-American payments firm Melio in a deal announced in June (the same month Xero’s stock hit an all-time high of A$196.52) and completed in October.

A distraction from ‘more winnable opportunities’

In a September 12 research note, Morningstar analyst Roy Van Keulen said the mega-acquisition was “unlikely to improve Xero’s prospects in the US” – a market that the Wellington-founded firm has been trying to crack for years.

In fact, Van Keulen saw the purchase (via a mix of cash, scrip and equity placement) as sucking resources from better growth opportunities.

Did he see anything to change his mind in Xero’s half-year result delivered on November 12 or the following conference call with analysts, hosted by chief executive Sukhinder Singh Cassidy and chief financial officer Claire Bramley?

“The short answer is ‘No’,” Van Kelen told the Herald. Xero is up against a well-entrenched competitor in the US that benefits from strong network effects, Intuit.

“This acquisition helps it get closer to product parity, but we think the company would have been better off trying to earn referral fees from companies like Melio or Bill.com.

He added: “By doubling down on the US, this is also distracting the company from seizing on more winnable opportunities, like the UK.”

When will Melio turn a profit? Xero won’t say

On a post-earnings conference call, Xero drew praise from analysts for rapid progress in integrating Melio with its own product. Melio billing is on track to be offered for Xero customers in the US next month.

And Singh Cassidy reiterated the Melio acquisition would “more than double” her firm’s FY2025 group revenue ($2.1b) by FY2028.

But she also qualified that it was an “aspirational target” rather than official guidance.

And when asked by Jefferies analyst Roger Samuels, who said it looked like Melio had lost $56m in the half-year, compared to about $60m in the previously comparable period, when Melio would contribute to Xero’s bottom line, Bramley replied: “We’re not going to give an exact date of when Melio becomes profitable. We’re just months into owning them.”

Singh-Cassidy said Melio grew revenue 68% to $183m in the first half, in line with Xero’s expectations. The start-up finished the period with 87,000 customers.

‘Exhausted’ pricing power

Van Kelen had a fresh reason for pessimism post-earnings.

In the first half, Xero increased its arpu (average revenue per user per month) by 19% – or 8% in constant currency terms – to $54.08.

But with churn rates and the cost of customer acquisition increasing, Van Kelen says that, in his view: “We’ve seen the exhaustion of Xero’s pricing power.”

There was still growth, but it was slowing in key markets as – in his view – price increases sparked customer defections.

Van Kelen saw it as notable that even during its period of hikes earlier this year, which caused squeals on social media, Xero did not raise prices on its cheapest plans.

The Morningstar analyst thinks Xero’s shares have further to fall.

He has a “fair value” estimate of A$100.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.