The share price of Zip Co Ltd (ASX: ZIP) has experienced significant fluctuations, dropping by 33% in less than two months. Despite an 8% increase during Wednesday’s trading session, investors may be questioning whether this downturn presents a buying opportunity.
The buy now, pay later (BNPL) company continues to report impressive growth metrics. In the first quarter of FY26, Zip announced a total transaction value (TTV) increase of 38.7%, reaching $3.9 billion. Additionally, revenue surged by 32.8% to $321.5 million, while net bad debts remained stable at 1.6% of TTV. Moreover, cash operating profit (EBTDA) saw remarkable growth of 98.1%, amounting to $62.8 million.
Positive Indicators Amidst Price Drop
Two particularly encouraging figures from the recent quarterly report are the 5.3% growth in active customers, bringing the total to 6.4 million, and an improvement in the cash net transaction margin (NTM) to 4%, up from 3.9% in the same quarter last year. These metrics suggest that while quarterly growth may fluctuate, the overall trajectory remains positive.
The company’s share buyback program indicates management’s confidence in Zip’s valuation, as they believe current prices do not reflect the company’s potential.
Analysts at UBS currently maintain a buy rating on Zip shares, with a price target of $5.40. This forecast implies a potential price increase of approximately 66% over the next year, contingent on UBS’s projections. The brokerage expressed satisfaction with the pace of cash EBTDA growth, which exceeded expectations last quarter.
While acknowledging a rise in loss rates in the United States, UBS emphasizes that this is manageable given the growth in new customers. They also highlighted strong performance metrics in Australia and New Zealand. Although receivables growth in these regions has not kept pace with TTV growth, UBS anticipates a recovery.
Revised Financial Forecasts Boost Confidence
Following the release of the quarterly figures, UBS raised its forecasts for TTV and revenue by 3% for the medium term. As a result, cash EBTDA projections were increased by 9% and 6% for FY26 and FY27, respectively. Earnings per share (EPS) estimates also saw substantial revisions, with increases of 19% and 4% for FY26 and FY27.
UBS projects that Zip’s net profit could reach $86 million in FY26 and $154 million in FY27, with expectations of a net profit of $385 million by FY30. Based on these forecasts, Zip’s share price is currently valued at 27 times the estimated earnings for FY27, which many analysts do not find excessive.
As investors weigh the potential of Zip shares, it is essential to consider various perspectives. While UBS advocates for purchasing Zip shares, other analysts, including those from Motley Fool, suggest considering alternative stocks. Scott Phillips, a Motley Fool investing expert, has highlighted five stocks he believes may currently offer better investment opportunities than Zip.
In summary, while Zip Co’s recent share price drop presents challenges, its robust growth metrics and positive forecasts from analysts may suggest a potential buying opportunity for investors willing to take on risk.
