When a stock falls more than 40% from its recent high, it usually scares investors away. But sometimes that fear creates opportunity rather than danger.
That's how I'm starting to feel about Zip Co Ltd (ASX: ZIP) shares right now.
After dropping around 45% from their October high, Zip shares look deeply out of favour despite the business continuing to deliver strong operating momentum. Based on its latest update, I think the market may be focusing on the wrong things.
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A sharp share price fall, but not a broken business
Zip's share price weakness hasn't been driven by a collapse in fundamentals. Instead, it has largely followed a broader sell-off across growth and fintech stocks, combined with some nervousness around tech valuations more generally.
What stands out to me is that this sell-off has occurred while Zip is producing some of the strongest operating results in its history.
In its most recent quarterly update, the company delivered record cash EBITDA of $62.8 million, up 98% year on year. Total transaction volume rose nearly 39%, while total income increased by more than 32%. Those aren't the numbers of a business going backwards.
The US business is growing
The most important part of the Zip story continues to be the United States.
US transaction volume rose more than 47% year on year in US dollar terms in the first quarter, while revenue climbed over 51%. Active customers increased by more than 480,000 over the past 12 months, and customer engagement metrics like average spend and transactions per customer also moved higher.
What I like here is that this growth is not being bought at any cost. Unit economics remain solid, with cash net transaction margins holding up and bad debts staying within target ranges. In other words, Zip is growing quickly without losing discipline.
Management upgraded its expectation for US transaction volume growth to be above 40% for FY26, which suggests momentum continued into the second quarter.
This appears accurate, with one Australian broker suggesting that app download data points to a very strong finish to 2025.
Improving profitability and operating leverage
One of the biggest changes at Zip over the past year has been the shift in how the business is viewed.
This is no longer a company burning cash in pursuit of scale. Zip is now producing meaningful operating leverage, with operating margins lifting to 19.5% from 13.1% a year ago.
That improvement has been driven by better funding costs, disciplined expense control, and the benefits of scale flowing through the model. The company also finished the quarter with more than $450 million in cash and liquidity, giving it flexibility to fund growth and return capital.
In fact, Zip recently increased its on-market share buyback from $50 million to $100 million, which I see as a strong signal of confidence from management at current prices.
A large addressable market
Despite its growth to date, Zip still operates in enormous addressable markets.
Digital payments, embedded finance, and flexible credit options continue to gain traction, particularly in the US. Zip's integration with platforms like Stripe, Google Pay, and Google Chrome autofill shows how management is positioning the product deeper into everyday commerce.
The company is also expanding its product set with initiatives like Pay-in-2 and broader embedded finance offerings, which could open up new use cases beyond discretionary retail spending.
From my perspective, Zip looks like a business that is still early in its global growth journey, even if the share price suggests otherwise.
Foolish Takeaway
Zip shares are well below their highs, sentiment is weak, and growth stocks remain out of favour. But when I look through its updates, I see a company delivering record earnings, accelerating US growth, improving margins, and strengthening its balance sheet.
That disconnect is exactly what makes the opportunity interesting. I'm not pretending this is risk-free. Growth stocks can stay unloved for longer than expected. But with Zip now profitable, scaling, and buying back shares, I think this pullback looks like a chance to get greedy while others remain cautious.
