Zip Co Ltd (ASX: ZIP) shares have been sold down heavily.
The buy now pay later (BNPL) company is trading at $2.20 on Friday, well below its 52-week high of $4.93. That means the share price has fallen by more than half from its peak.
I think the sell-off has made the stock more interesting. Here are three reasons I would buy Zip shares now.
Image source: Getty Images
The valuation has reset
The first reason is valuation.
According to CommSec, consensus estimates point to earnings per share of 9.2 cents in FY26, 10.9 cents in FY27, and 17 cents in FY28. That compares with 6.1 cents in FY25.
Based on the $2.20 share price, Zip is trading on approximately 24 times estimated FY26 earnings, 20 times FY27 earnings, and 13 times FY28 earnings.
I think that looks reasonable if the company can deliver on those forecasts.
This is still a growth stock, and the market will punish it if earnings momentum disappoints. But the valuation no longer looks like it is pricing in perfection.
The FY28 estimate is the one that interests me most. If Zip can grow earnings to 17 cents per share, today's share price may look quite undemanding in hindsight.
The business has become more disciplined
The second reason I like Zip is that the company looks more mature than it did during the earlier buy now pay later boom.
Back then, the market was excited by rapid customer growth, merchant wins, and global expansion. The problem was that many BNPL companies were also burning cash, chasing too many markets, and relying heavily on future profitability.
Zip now looks like a more focused business.
The company is concentrating on the markets that matter most to its strategy, particularly Australia and New Zealand and the United States. That gives management a clearer job: grow where the opportunity is attractive, keep credit quality under control, and keep improving profitability.
I think that change in mindset matters.
A payments business can grow quickly and still disappoint investors if losses expand or underwriting deteriorates. Zip needs to keep proving it can grow without allowing risk to run too far ahead of returns.
So far, the earnings estimates suggest analysts expect meaningful progress over the next few years.
The US opportunity is large
The third reason is the potential of the US business.
The US remains a much larger prize than Australia and New Zealand. It is a huge consumer market, and many customers are still looking for flexible ways to manage purchases, cash flow, and short-term spending.
Zip does not need to dominate the US payments market to create value. It needs to keep building a profitable niche with customers and merchants that find its product useful.
That is why I think the current share price weakness is interesting. The market is not treating Zip like a perfect growth story anymore. Expectations have come down, but the company still has a sizeable opportunity if it can execute well.
There are risks to watch, including consumer stress, regulation, funding costs, competition, and credit losses. But I think those risks are now being weighed against a much more attractive starting valuation.
Foolish takeaway
Zip shares have fallen a long way from their high, and that has changed the investment case.
This is no longer a stock where investors are being asked to pay a huge price for distant hopes. The company is expected to grow earnings strongly over the next few years, the valuation has reset, and the US opportunity still gives the business room to become much larger.
I would expect volatility. Zip is exposed to consumer credit and market sentiment towards growth shares.
But at around $2.20, I think the balance of risk and reward looks appealing. If earnings keep moving in the right direction, this could be a much better business than the current share price suggests.
