A 23% decline in its shares from July 9 to yesterday prompted the NZX to issue a ''please explain'' notice to Xero; which responded it was in compliance with its continuous disclosure obligations to the market.
Xero said its share price had a ''history of high volatility'' and buying and selling by large institutional investors could ''significantly'' affect the price.
Xero's 130% share price gain during the past year tagged it the NZX's top-performing stock.
On July 5, Xero became a more than $2 billion company when its shares passed the $18 mark, but since then they had shed $3.55, or almost 20%, to initially trade around $14.50 yesterday, then lifted towards $15.75.
Xero has lost $420 million in value; leaving its market capitalisation at around $1.7 billion.
Craigs Investment Partners broker Chris Timms said Xero's share price was ''getting knocked around'', and ''could have further to go'' down.
Xero, which has not posted a profit in five years, this year booked revenue of $39 million for the year to March and a net loss of $14.4 million in the year to March, While trading volumes of shares had not been huge, reports during the past few days have credited the declining price to ''profit taking'' by shareholders who had been with Xero for some time.
Mr Timms said other investors were now ''beginning to think the same thing'', noting the price was declining as there were no bid volumes to pick up shares on sale.
At the time Xero was near to hitting $18 per share, Craigs research was released, profiling Xero and its improving profit margins and revenue growth, but also signalling a caution over the spiralling share price and rising risk profile.
''However, a rich share price implies high expectations and therefore raises the company's risk profile.
''We fear that setbacks of any kind could have the potential to cause a significant re-rating in the share price,'' the research said.
At share price levels near $17, Craigs said they were pricing in not only continued success in New Zealand and Australia but also considerable customer growth in the United Kingdom and the United States, where Xero ''has a lot of potential'' to capture US market share as cloud technology is adopted during the coming decade.
''We estimate that the US online accounting market could potentially be 40 times the size of New Zealand's and over six times the size of Australia,'' Craigs said.
While Xero's growth and New Zealand market share was beginning to mature, the growth opportunities in Australia, the US and the UK are substantial.
''We have yet to see the company get a strong foothold in the UK and the US markets, which will be an important determinant as to whether Xero can fulfil its revenue growth forecasts,'' Craigs said.
