Zip Co Ltd (ASX: ZIP) has given investors a wild ride over the past year.
The share price is currently around $2.64, well above its 52-week low of $1.38 but still a long way below the 52-week high of $4.94.
That leaves investors with an interesting question. Has the recovery already gone far enough, or is there still value for those willing to accept the volatility?
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The growth opportunity
Zip provides buy now, pay later services that allow customers to divide purchases into more manageable repayments.
The company's long-term opportunity depends heavily on continued growth in the United States, where the consumer market is far larger than Australia's, and digital payments are still evolving.
I like the potential for Zip to attract more customers, add merchants, and increase transaction volumes across its platform. A larger network can make the service more attractive to retailers because it gives them access to consumers who may be more willing to complete a purchase or spend more.
Zip can then earn revenue through merchant fees and customer-related charges, while using its data to improve credit decisions and manage risk.
I also like that the company appears to have moved beyond simply chasing growth at any cost. Stronger underwriting, tighter expense control, and greater attention to profitability could allow more of its revenue growth to reach the bottom line.
That is the part of the investment case that interests me most.
Is the valuation attractive?
The current valuation looks reasonable if Zip can deliver the earnings growth expected by analysts.
According to CommSec consensus estimates, Zip is forecast to generate earnings per share of 9.1 cents in FY26, 12.7 cents in FY27, and 18.2 cents in FY28.
At a share price of $2.64, those forecasts place Zip on forward price-to-earnings ratios of approximately 29 times FY26 earnings, 21 times FY27 earnings, and 15 times FY28 earnings.
The FY26 multiple is still demanding for a financial technology company exposed to consumer spending and credit conditions.
However, the valuation falls quickly across the forecast period. A multiple of around 15 times FY28 earnings could prove inexpensive if Zip is still growing strongly by then and has established a more dependable profit record.
The market may also begin pricing in later years before those earnings arrive, which could support the share price if the company continues meeting expectations.
What could go wrong?
Zip remains a higher-risk investment.
A weaker economy could lead to lower spending and increased customer defaults. The company also faces competition from other payment platforms, banks, credit cards, and retailers offering their own instalment options.
Regulatory changes could increase costs or place limits on how buy now, pay later providers operate.
There is also little room for disappointing results when the market expects earnings to double between FY26 and FY28. Any sign that growth is slowing or credit losses are rising could cause another sharp share price fall.
I would therefore keep the position measured rather than treating Zip like an established blue-chip company.
Foolish takeaway
I think Zip shares are a buy at around $2.64, particularly for growth investors who can tolerate volatility.
The share price has already recovered strongly from its 52-week low, although it remains well below the level reached earlier in the year.
More importantly, the earnings forecasts suggest the valuation could become increasingly attractive if Zip delivers the expected profit growth.
There are clear risks around credit quality, regulation, competition, and consumer spending. But for investors with a long holding period and a willingness to accept those uncertainties, I think Zip offers enough upside to justify buying before the end of July.
