Zip Co Ltd (ASX: ZIP) shares are bouncing back on Friday afternoon to $1.94, a gain of 5.3% at the time of writing.
The buy now, pay later (BNPL) provider is clawing back some of this year's heavy losses, which still stand at 41%.
Markets don't seem to be reacting to a single catalyst today. Investors just see the current share price as a buying opportunity, driving Zip shares higher.
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Sharp sell-offs, short rallies
Zip operates across Australia, New Zealand, and the US. It gives the company geographical diversification that smaller rivals lack. As a result, its embedded finance products and merchant partnerships continue to grow transaction volumes.
Over the past few weeks, Zip shares have been one of the more volatile names on the ASX. They have been swinging from sharp sell-offs after disappointing full-year results and negative sentiment to periodic rallies that leave traders scratching their heads.
Share buyback of $50 million
One of the biggest new developments is the company's decision to implement a $50 million on-market share buyback. This will kick off in early March and will run for up to 12 months.
It appears management believes the 40% plunge this year so far has pushed Zip shares into undervalued territory.
With a strong balance sheet behind it, the company sees an opportunity to deploy surplus capital and back its shares. It's effectively returning value to shareholders.
Strong growth, cautious signals
On the earnings front, recent results showed strong first-half growth and partial guidance upgrades. Still, the market was zeroing in on a few cautious signals.
Revenue margin slipped to 7.9% as the faster-growing, lower-margin US business accounted for more transaction volume. Net bad debts also ticked up slightly to 1.73% of TTV, still within targets of the Zip-board.
Investors were also digesting guidance that second-half cash EBITDA is expected to match the first half. This could mean that profit growth may plateau rather than accelerate.
Credit and macro risks
Risks that keep many brokers and fund managers cautious haven't disappeared. The broader buy now, pay later landscape faces regulatory change in key markets.
Competition from entrenched players has also intensified, and the spectre of rising credit losses has increased if consumers tighten their belts.
Credit and macro risks are as real today as they were six months ago. The ordinary ups and downs of quarterly earnings in consumer finance are amplified for a stock that has lost a great deal of trust and seen heavy selling from momentum-driven funds.
What next for Zip shares?
Analyst outlook is generally optimistic. Most brokers see upside if Zip can convert new products like flexible pay-in-2 options into sustainable revenue.
Jefferies sees this year's share price weakness as a buying opportunity. They recently upgraded Zip shares to a buy with a $4.20 price target. This implies 118% upside over 12 months.
UBS remains bullish too, keeping its buy rating and a $4.50 target, pointing to roughly 132% potential gains over the next 12 months.
