The Zip Co Ltd (ASX: ZIP) share price has plunged close to 40% since the beginning of the year, as the chart below shows. This can be an opportunity to invest if the business is growing its operations or simply going through a valuation adjustment.
Investors don't seem to have appreciated the company's recent progress in the second quarter of FY25. When companies are priced for significant growth, an update that isn't quite as good as expected can knock the market's confidence.
Let's have a look at the latest update from the company, which could have influenced Zip shares: the FY25 half-year result.
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Earnings recap
There are a few different drivers of the company's profitability. There's how much value the company funds for consumers (called the total transaction value (TTV)), the revenue margin on the TTV, cash operating profit (EBITDA – which includes its operating costs) and how much of its TTV goes unpaid (called net bad debts).
For the first six months of FY25, the company reported that TTV rose 23.9% to $6.2 billion, total income grew 19.8%, the revenue margin reduced to 8.2% (down from 8.5%), cash EBITDA jumped 117.1% to $67 million and net bad debts (NBD) were 1.6% to TTV. It achieved a cash net transaction margin (NTM) of 3.8%, up from 3.6% in the first half of FY24.
This result was largely driven by the US. ANZ revenue declined 2.1% to $206.3 million, and US revenue rose 41.1% to $302.9 million.
In terms of the outlook, the company said it's well-placed to deliver continued growth and operating leverage. Zip said, subject to market conditions, it expects to deliver cash EBITDA of at least $147 million in FY25.
Is the Zip share price a buy?
Let's have a look at what the broker UBS thinks of the ASX share. After seeing the result, UBS said:
ZIP's SP took a ~30% correction post the 2Q25 update in Jan'25 on several key factors: 1) An EBTDA miss vs consensus; 2) Lower AU revenue yield; and 3) Concerns around OPEX. These concerns were eased at the 1H result today with FY25 Cash EBTDA guidance of at least $147m roughly in line with where consensus was prior to the quarterly, the guidance implying a seasonal bounce back in AU revenue yield in 2H, and OPEX guidance for ~10% (top end of existing range).
The growth setup remains favourable: US momentum has continued, but we do want to see customer growth accelerate (we forecast it will); the AU business is back to growth (10% TTV growth y/y in Dec'24); NTM is strong with some further funding cost tailwinds to come; and credit performance remains solid.
What is difficult to quantify at this point is to what degree US customer growth can be accelerated while remaining within the NBD range of 1.5-2%, but in the medium term greater engagement looks set to remain a TTV tailwind as existing customer cohorts mature, new product structures are launched, and new merchant verticals are added. Retain Buy rating.
As noted, UBS has a buy rating on Zip shares, with a price target of $3.35. In other words, the broker is predicting the buy now, pay later stock could rise by close to 80% in the next year. Time will tell if the company can deliver strong enough growth to spur that size of a rise in the 12 months ahead. However, the broker does seem bullish at the current Zip valuation.
Zip is currently trading at 14x FY29's estimated earnings.
