Zip shares have slumped 26% in 2025. Time to consider buying?

Zip Co Ltd (ASX: ZIP) shares have had a rough performance since the start of 2025, with a drop of almost 26%. The fall is particularly noteworthy given it has occurred during a period when the S&P/ASX 200 Index (ASX: XJO) has climbed by close to 4%.

Despite the lacklustre start to 2025, as the above chart shows, the Zip share price is still up by around 140% over the past 12 months, so it's not all bad news for investors.

Following the recent dip, the question is whether the stock is now good value or whether it's still too expensive. Let's remind ourselves what the company recently reported and then take a look at what an expert makes of the situation.

Quarterly recap

For the three months to 31 December 2024, Zip revealed total transaction value (TTV) growth of 24.8% year over year to $3.4 billion, and revenue soared 20.5% to $269.4 million. The number of active customers increased 1.5% year over year to 6.3 million, and merchant numbers rose 7.6% to 81,900.

The company's revenue margin declined from 8.2% in the second quarter of FY24 to 7.9% in the second quarter of FY25.

Zip reported its cash transaction margin was 3.6% for the quarter, up from 3.5% in the second quarter of FY24. Net bad debts were 1.5% of TTV for the three months to December 2024, down from 1.7% in the prior corresponding period.

The positive progress of the company's growth and profitability metrics led to cash EBTDA jumping 50.2% to $35.3 million.

The market didn't seem to like these numbers, sending the Zip share price down 25% on the day of the update. It's now down a total of 33% since 29 January 2025 after news of a draft government report regarding buy now, pay later regulations further dragged on the company's valuation.

Why did the market punish Zip shares?

According to a note from UBS, some of the company's growth numbers were in line with what the market was expecting, namely US customer numbers (up 6% year over year), transactions (up 32% year over year) and TTV (up 39% year over year).

The broker highlighted that ANZ TTV saw "marginal growth" for the first time since the second half of FY23 and growth in TTV per active customer "continued to accelerate" (with growth of 7% year over year).

In UBS' view, the significant fall in the Zip share price following the update was driven by a number of factors.

First, Zip's overall revenue missed expectations because of the ANZ revenue yield miss.

Second, cash EBTDA didn't deliver what the market was expecting, with the operating margin declining 10 basis points (0.10%).

Third, operating costs were higher than expected.

Fourth, UBS said there has been a "sequential moderation" in TTV per active customer growth in the US, which currently drives around 80% of US TTV growth.

Finally, the broker pointed to "crowding and positive investor positioning" heading into the update.

Is the Zip share price a buy?

UBS thinks the Zip share price reaction was "overdone", with seasonality and timing explaining a large amount of what has gone wrong in 2025. The broker highlighted the continued strong growth in the US but recognised the ASX stock will be "very sensitive to changes in earnings momentum given the strong share price run".

The broker noted that ANZ revenue margin of 10.2% was only down 30 basis points (0.30%) year over year, and it's forecasting a "much stronger" margin in the second half of FY25.

Here's how UBS explained why it wasn't worried about the margin:

1) Higher TTV seasonality in Q2 combined with a much slower book turn in ANZ means there is a revenue lag beyond just the quarter resulting in a lower yield; and 2) Through CY24 the shrinking ANZ TTV/receivables had a positive impact on yield and now it's back to growth those figures are hard to comp. This ANZ yield reversion drives our forecast re-acceleration of group revenue in 2H25.

On the Cash EBTDA miss vs consensus, we understand this was driven by OPEX (as opposed to cost of sales) and there was some pull forward of growth investment in 2Q. ZIP continues to expect 6-10% OPEX growth in FY25 which implies this is not an ongoing step-change upwards in OPEX in the near term.

In other words, UBS expects a recovery of revenue growth in the second half and costs only jumped because Zip decided to invest in growth sooner than expected. Time will tell whether UBS' thoughts are correct.

UBS still rates Zip shares as a buy, with a price target of $3.35 (which was lowered from $3.65). That means the broker is suggesting the Zip share price could rise by around 50% in the next year.

The broker forecasts Zip could reach positive profitability in FY25 and make $41 million of net profit after tax (NPAT).