It's been a wild ride for investors in Zip Co Ltd (ASX: ZIP) shares. The Zip share price has surged another 9.2% to $2.55 during Monday afternoon trade, capping off a remarkable run.
Over the past five trading days, the buy now, pay later provider is up 36%, and an eye-catching 69% over the past month alone. Zoom out, and the picture gets even more volatile. Zip shares are down 40% over the past six months, yet are still up 50.9% over the past year. Hectic barely covers it.
So, what's driving the latest rally and do experts think there's more to come?
Image source: Getty Images
Positive surprise and record cash
The catalyst was Zip's third-quarter update, which appears to have reset market expectations. The company reported record cash EBITDA of $65.1 million for the quarter, marking a 41.5% increase on the prior corresponding period. That kind of growth tends to get attention, especially in a sector that has spent the past few years under pressure.
Even more importantly, management of Zip shares upgraded its full-year outlook. Zip now expects group cash EBITDA of at least $260 million, up from previous guidance of around $248.6 million. In a market that rewards positive surprises, that upgrade has clearly struck a chord with investors.
Scaling profitability
There's also a broader narrative at play. Zip has spent the past few years tightening its operations, exiting underperforming markets, and focusing on profitability. The latest result suggests those efforts are paying off, with stronger margins and improved cost control starting to flow through.
On the strength side, Zip is showing it can scale profitably while maintaining solid customer growth. Its core markets are performing well, and improving credit quality and disciplined lending are helping to reduce risk. If the business can sustain this balance, Zip shares start to look far more compelling than they did during the sector's downturn.
But the risks haven't disappeared. Buy now, pay later remains a cyclical and competitive space, sensitive to consumer spending and economic conditions. Any slowdown in retail activity or deterioration in credit performance could quickly impact earnings. The recent share price surge also raises the question of how much good news is already priced in Zip shares.
That leaves investors weighing momentum against sustainability.
What next for Zip shares?
For now, the broker community is firmly in the bullish camp. Nine out of 11 analysts rate Zip shares as a strong buy, with the remaining two sitting at buy. The average 12-month price target stands at $3.80, implying around 49% upside from current levels. The most optimistic forecast goes as high as $5.40. That's more than double the stock's current price.
After such a rapid run, volatility is almost guaranteed. But if Zip continues to deliver on earnings and maintain its improved discipline, the rally may not be over just yet.
