Trying to keep up with Zip Co Ltd (ASX: ZIP) shares has become a challenge even for seasoned investors.
The buy now, pay later (BNPL) stock finished Wednesday down 5% to $2.65. That leaves the shares down around 15% over the past five trading days, 19% for the year to date, 10% over the past 12 months, and roughly 45% below their October peak.
So, what's behind the wild swings, and what should investors be watching next?
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The business is improving
Despite the volatile share price, Zip's underlying business is arguably in the strongest position it has been in for several years.
The company is growing again, profitability is improving, analysts have become more constructive, and management continues to buy back shares under its $50 million on-market buyback program.
Just as importantly, investors are now paying closer attention to earnings rather than simply transaction growth.
That shift has worked in Zip's favour as stronger revenue increasingly translates into higher profits.
Strong momentum continues
Zip delivered another solid operating update in the third quarter of FY26. Transaction volume rose 22.4% to $4 billion, while total income climbed 20.2% to $335.2 million.
The standout figure was cash EBITDA, which surged 41.5% to a record $65.1 million. Operating margins also expanded to 19.4%. The stronger performance prompted management to lift FY26 cash EBITDA guidance to at least $260 million.
Much of that momentum continues to come from the United States. US transaction volumes and revenue both increased more than 43% in US dollar terms during the quarter, while active customer numbers grew 9%.
Those figures suggest Zip is continuing to win new customers while existing users remain highly engaged.
One key risk remains
Not everything is moving in the right direction. Bad debts remain the biggest concern for investors. Group net bad debts increased to 1.93% of transaction volume during the third quarter, up from 1.64% a year earlier.
Encouragingly, management of Zip shares noted that US net bad debts remained stable at 1.86% and expects them to decline below 1.75% during the fourth quarter.
If that happens, it would provide further evidence that Zip can continue growing without sacrificing credit quality.
All eyes on August
The company's next trading update on 20 August could prove pivotal.
Investors in Zip shares will be looking for continued growth in transaction volumes, another improvement in profitability, and confirmation that bad debts are moving lower.
Foolish takeaway
Zip shares remain volatile, but the company's fundamentals are moving in the right direction.
Improving earnings, strong US growth, and ongoing share buybacks are encouraging signs.
However, with credit quality still under close scrutiny, the next earnings update could determine whether Zip's next recovery can start, or whether the recent volatility has further to run.
