Trying to keep up with Zip Co Ltd (ASX: ZIP) shares lately has been enough to give investors whiplash.
The buy now, pay later (BNPL) stock finished Wednesday down 3% at $3.15. Yet it's still up 37% over the past month, down 4% for 2026, and barely changed over the past year.
Confused? You're not alone.
So why all the volatility? And could there be more to come?
Image source: Getty Images
The business is improving
The good news is that Zip is in a far stronger position than it was only a few months ago. The company is growing again, profitability is improving, brokers are becoming increasingly optimistic, and its on-market share buyback continues quietly in the background.
Most importantly, investors are no longer focusing solely on transaction growth. They're paying much closer attention to earnings. That shift matters because Zip is finally converting stronger revenue into healthier profits.
During the third quarter of FY26, total transaction volume increased 22.4% to $4 billion. Total income rose 20.2% to $335.2 million.
Even better, record cash EBITDA jumped 41.5% to $65.1 million, while operating margins expanded to 19.4%. Those stronger-than-expected numbers prompted management of Zip shares to upgrade FY26 cash EBITDA guidance to at least $260 million.
America is doing the heavy lifting
Much of that momentum continues to come from the US. Zip reported US transaction volume and revenue both increased by more than 43% in US dollar terms during the quarter. Active US customers also grew 9%, demonstrating that the business continues to attract new users while existing customers remain engaged.
Management has also been supporting the share price through its $50 million on-market buyback announced earlier this year, with Zip shares continuing to be repurchased through June.
The risk investors can't ignore
Of course, not everything is moving in the right direction. Bad debts remain the biggest concern. Group net bad debts increased to 1.93% of transaction volume during the third quarter, compared with 1.64% a year earlier. That's never a number investors enjoy seeing.
The company did provide some reassurance. US net bad debts remained stable at 1.86%, and management expects that figure to fall below 1.75% during the fourth quarter.
The next trading update from Zip will therefore be critical. Investors want proof that improving profitability isn't coming at the expense of credit quality.
What do analysts think?
Wall Street isn't the only place where sentiment has improved. According to TradingView data, 11 of the 12 analysts covering Zip currently rate the stock either a buy or strong buy.
The average price target sits at $3.87, implying upside of around 23%. The most optimistic analyst believes Zip shares could climb to $5.40 over the next 12 months, representing potential upside of roughly 71%.
Foolish takeaway
Zip remains one of the ASX's more volatile growth stocks, and that's unlikely to change anytime soon. But unlike previous rallies driven largely by optimism, this one is increasingly backed by stronger earnings, expanding margins, and a rapidly growing US business.
If management can keep bad debts under control while continuing to grow profits, today's rollercoaster ride may eventually start looking like a sustained recovery.
