The Zip Co Ltd (ASX: ZIP) share price is having a rough Thursday session.
The buy-now, pay-later company's shares have fallen heavily to around $2.09, adding to what has already been a volatile year for shareholders.
At this level, the Zip share price is well below its recent highs. But has the sell-off gone far enough to create a buying opportunity?
I think there is a strong case that it has.
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How cheap is the Zip share price?
I think some context around the share price could be helpful.
Zip shares have traded as high as $4.94 over the past 52 weeks and as low as $1.38. At $2.09, the stock is now almost 60% below that 52-week high.
Of course, a falling share price does not automatically make a stock cheap. The more important question for me is what investors are paying relative to the earnings Zip could generate over the next few years.
On that front, the valuation is starting to look quite interesting.
Consensus forecasts indicate earnings per share (EPS) of approximately 15 cents in FY27.
At a share price of $2.09, Zip shares are trading at a forward price-to-earnings (PE) ratio of roughly 14 times FY27 forecast earnings.
The valuation becomes even cheaper again next year if Zip meets expectations.
Consensus EPS is expected to rise to 18 cents in FY28. That would put the shares on a forward PE ratio of around 12 times.
By FY29, analysts are forecasting EPS of 22.4 cents, which would reduce the PE ratio to just over 9 times at today's share price.
For a business still expected to deliver meaningful earnings growth, I think those multiples look cheap.
Why I think the sell-off creates an opportunity
Zip is still a growth investment, so I would not look at the current valuation in isolation.
The investment case depends on the company continuing to expand earnings over the coming years. If the consensus forecasts are roughly right, EPS would rise by almost 50% between FY27 and FY29.
Investors need to remember that growth stocks can remain volatile. Zip has already moved between $1.38 and $4.94 during the past year, showing just how quickly market sentiment can change.
Forecasts can also move. If earnings growth disappoints, the low forward PE ratios based on FY28 and FY29 expectations may prove less compelling than they currently appear.
Still, I think today's share price gives investors a reasonable margin for some uncertainty.
Foolish takeaway
For me, the Zip share price is looking cheap at around $2.09.
A FY27 PE ratio of roughly 14x does not look demanding, and the valuation could fall into the single digits by FY29 if current earnings forecasts are met.
There is plenty that Zip still needs to deliver, and I would expect the share price to remain volatile along the way. But after such a sharp fall from its 52-week high, I think the risk/reward is compelling.
At $2.09, I would be comfortable buying Zip shares and holding them for the next few years.
