Figure 1: AI eating software’s lunch? We don’t think so
Source: Visible Alpha, Sandstone Insights
At the heart of the recent sell-off is the thesis that AI will destroy their business models of leading software names. AI will stall software’s growth, and ultimately the moat around these names. Desktop publishers will no longer use Adobe’s suite of tools to create and edit images for display on the web.
Salesforce will be rendered obsolete by AI, which can create a travel agenda based solely on your prospects emails in Office 360. Accounting specialist Xero’s TAM will be much reduced as traditional banks add agentic AI tools to their core banking products, displacing the role of specialist accounting software tools.
In our view, the narratives that AI poses an existential threat to software companies overlook a key point – AI is likely to improve margins (lowering the cost base) and accelerate growth (through larger, more valuable product suites) for infrastructure software providers. Like Xero, here in Australia.
Software vendors with foundations based in data, networking, observability, and security have powerful moats, and in our view, are likely to be difficult to dislodge.
If AI was supposed to eat the revenue of software companies, then why are we beginning to see software vendors show accelerating revenue growth? AI is becoming a tailwind for quality software firms. From Intuit (INTU).
“We launched a transformative all-in-one business platform with a virtual team of AI agents and AI-enabled human experts that can manage lead to cash for customers.” CEO Sasan Goodarzi 4Q25 Conference Call.
Figure 2: AI begins to accelerate Intuit’s revenue growth
Source: Visible Alpha, Sandstone Insights
Figure 3: XRO revenue has been consistently +20%, with growth expected to continue at similar rate into 2027E
Source: Visible Alpha, Sandstone Insights
The XRO share price is down ~ 25% from its all-time highs in mid-2025. The surprise acquisition of US loss-making payments business Melio for US$3bn, combined with the meltdown in US software share prices, has weighed on the XRO share price. Since Melio, there are 7% more shares on issue, and earnings forecasts for FY26E are 10% lower.
The acquisition raises questions about management's strategy. Melio is expected to incur losses for three years, a drag on earnings. US payments industry is a very competitive space, and there are market concerns around the negative impact AI may have on software companies.
XRO’s core business continues to perform well. Another round of price rises was implemented in Jul 25. Customer plans have been restructured in the UK and the US, and new company registrations continue to increase, with nearly 36,000 new companies registered in Australia in July.
EPS growth is forecast at 46% in FY26E and 39% in FY27E, so earnings growth, although somewhat blunted by Melio, remains very high.
Xero is a high-quality company that has been duly punished for the acquisition and caught in the AI-related software sell-off.
The punishment is now overdone, and the stock is back to attractive buying levels. Upcoming catalyst is the 1H26E earnings release in mid-November.
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