Zip Co Ltd (ASX: ZIP) shares are having another ugly day, falling 4% to $2.70 on Tuesday afternoon. That puts the buy now, pay later (BNPL) stock down around 14% over the past month, down 18% in 2026, and down 18% over 12 months.
Worse, Zip shares are now roughly 45% below their October peak.
So, what's gone wrong?
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Business is actually getting stronger
Here's the awkward part: the share price looks terrible, but Zip's underlying business is arguably in its strongest position in years.
The company is growing, profitability is improving, analysts have become more positive, and management is buying back Zip shares through its $50 million on-market buyback program.
Investors are also increasingly focused on profits rather than simply chasing transaction growth. That's important because Zip is now showing it can turn rising revenue into substantially higher earnings.
The growth numbers remain impressive
Zip's third-quarter FY26 update delivered plenty to like. Transaction volume jumped 22.4% to $4 billion, while total income increased 20.2% to $335.2 million.
Cash EBITDA was the standout, surging 41.5% to a record $65.1 million. Operating margins also expanded to 19.4%. That performance was strong enough for management to lift FY26 cash EBITDA guidance to at least $260 million.
The US remains the star performer. US transaction volume and revenue both increased more than 43% in US dollar terms, while active customers grew 9%.
That's a pretty compelling growth story.
But here's the problem
Not everything is moving in the right direction for Zip shares.
Bad debts remain the elephant in the room. Group net bad debts increased to 1.93% of transaction volume in the third quarter, up from 1.64% a year earlier.
That's something investors can't afford to ignore, particularly because BNPL businesses are exposed to changing consumer spending and credit conditions.
The good news is that US net bad debts remained stable at 1.86%, with management expecting them to fall below 1.75% in the fourth quarter.
If that happens, it could provide some much-needed reassurance that Zip can keep growing without allowing credit losses to spiral.
What's next for the BNPL stock?
Zip remains a higher-risk investment.
The company faces competition from banks, credit cards, retailers, and rival payment platforms. Regulatory changes could also increase costs or restrict how BNPL providers operate.
And with the market expecting earnings to roughly double between FY26 and FY28, the bar is getting higher. Any slowdown in growth or deterioration in credit quality could send Zip shares tumbling again.
The next major test arrives on 20 August, when Zip is scheduled to release its next trading update.
Investors will want three things: continued transaction growth, expanding profitability and, most importantly, evidence that bad debts are heading lower.
Until then, Zip's biggest problem may not be its business. It may be convincing investors that the impressive numbers can continue.
