Investments rarely fall by as much as the Zip Co Ltd (ASX: ZIP) share price did last week in a single day. After the buy now, pay later business reported its result, it dropped 34%!
The numbers weren't quite as strong as some investors may have hoped, but broker UBS saw plenty of positives, and believes the ASX share could be a big opportunity at this price.
Let's see why UBS thinks the Zip share price reaction "presents [an] attractive entry point as growth remains intact".
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Attractive time to buy
UBS acknowledged that the FY26 first-half result was a "slight miss" compared to analyst expectations, but the 34% decline seemed like "an overreaction" because US growth remains strong.
The market has seemingly focused on an increase in the net bad debts, but UBS suggested this was "not unexpected" because Zip is now focusing on customer growth in the region and it's still within the comfort range of between 1.5% to 2%.
UBS said that it remains comfortable on the growth outlook for the company in the US as structural tailwinds continue and it sees "benefits longer term to net bad debts as Zip's pay-in-8 volumes continue to season".
Even so, after seeing the report, UBS decided to somewhat lower its projections between FY26 to FY28 due to lower customer additions in the US (to an average of 0.4 million per year from 0.45 million), an increase in net bad debts from 1.67% to 1.8%, and foreign currency headwinds from a stronger Australian dollar.
However, those negatives are somewhat offset, in UBS' eyes, by stronger expected US total transaction value (TTV)/customer growth in the second half, improvements in interest cost tailwinds and general operating expenditure efficiencies.
It's expecting Zip's US TTV to grow by 38% in the second half of FY26, then grow 30% in FY27 and 22% in FY28. It thinks BNPL can gain more market share and focus on predominantly non-discretionary sectors that are more resilient through the economic cycle.
What is the Zip share price valuation?
UBS thinks the company could deliver an EPS compound annual growth rate (CAGR) of 30% for over the next three years. The broker thinks that's attractive compared to other BNPL and banking peers considering the Zip share price is trading at around 15x FY27's estimated earnings.
The broker has a price target of $4.50 on the buy now, pay later company. That suggests a possible one-year rise of around 140% from where it is at the time of writing.
