The Zip Co Ltd (ASX: ZIP) share price has seen enormous volatility over the last few years (as the chart below shows), which can open up a major opportunity for investors willing to buy low when the valuation drops. Despite an 8% rise during Wednesday's trading, the Zip share price is still down 33% in less than two months.
The buy now, pay later business continues to deliver rapid top-line growth, and it's becoming increasingly profitable.
In the first quarter of FY26, the company said that its total transaction value (TTV) grew by 38.7% to $3.9 billion, income rose 32.8% to $321.5 million, net bad debts were flat at 1.6% of TTV, and the cash operating profit (EBTDA) grew by 98.1% to $62.8 million.
Two of the most pleasing figures from the company's quarterly report were 5.3% growth of active customers to 6.4 million and the cash net transaction margin (NTM) improving to 4% (up from 3.9% in the first quarter of FY25).
While growth will fluctuate quarter to quarter, virtually all the numbers were pleasing to see, in my view.
I also think it's a good vote of confidence in the company's future that the buy now, pay later business has been utilising its share buyback, suggesting management believes the Zip share price was undervalued.
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Is the Zip share price a buy?
UBS currently has a buy rating on Zip shares, with a price target of $5.40. That implies a possible rise of approximately 66% over the next year, if UBS analysts are correct.
The broker was impressed by the pace of cash EBTDA growth last quarter, which was stronger than expected.
UBS noted that the US saw a loss rate that's trending higher, but that makes sense because of the growth of new customers, but it's "still at a comfortable level balancing growth and profitability".
For Australia and New Zealand, UBS noted strong metrics. While ANZ's receivables growth continues to lag stronger TTV growth, the broker is forecasting a catch-up from here.
Following the release of those numbers for the first quarter, UBS increased its forecasts for TTV and revenue by 3% for the medium term. This led to cash EBITDA upgrades of 9% and 6% for FY26 and FY27, respectively, while earnings per share (EPS) projections were hiked by 19% and 4%, respectively, for FY26 and FY27.
UBS predicts that Zip's net profit could reach $86 million in FY26 and $154 million in FY27. By FY30, the broker expects that Zip could reach $385 million in net profit.
Taking that all into account, the Zip share price is valued at 27x FY27's estimated earnings, which doesn't seem expensive to me at all.
