Zip Co Ltd (ASX: ZIP) shares have fallen more than 50% over the past year, but according to the analyst team at UBS, it could be time to buy the dip.
UBS has a buy rating on Zip shares and a very bullish share price target, which I'll get to shortly.
First, let's have a look at their most recent trading results to see how they're doing.
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Share falls depsite record trading results
Zip in mid-August reported total income of $1.35 billion, up 24.6% on FY25, and record cash EBTDA of $268.9 million, up 57.9%.
The company's total transaction volume (TTV) increased 27.2% to $16.7 billion, while the volume in the US market grew 42.5%.
Net bad debts increased from 1.52% to 1.77% in line with management's expectations.
Zip Chief Executive Officer Cynthia Scott said it was a strong result.
She added:
Consistent execution has built the platform to deliver our next phase of growth and innovation. In FY26, we exceeded our targets with record cash earnings of $268.9m, up 57.9%, underpinned by material cash earnings growth in both markets. We maintained strong unit economics, expanded operating leverage and reinforced the value of our differentiated business model. Our focus on exceptional customer experiences is translating into stronger engagement. In the US, we achieved more than 40% growth in both TTV and revenue for a second consecutive year while adding new customers at scale. In ANZ, we returned to revenue and Australian receivables growth, led by the continued success of our Zip Plus product.
Ms Scott said the company was targeting cash earnings of $340 million in FY27, which would be a 26% increase.
Importantly, in the US market, the company said that the majority of TTV "continued to be derived from predominantly non-discretionary expenditure, with health, education, auto and transport the fastest growing categories''.
Broker sees Zip shares as cheap
UBS said this was a key strength of the company.
As they said:
Whilst we are watching macro risk, we see these concerns overplayed given Zip's exposure to non-discretionary spend in the US, and slowing macro potentially catalysing growth in the buy now pay later space as consumers consider non-traditional cash flow management tools over traditional credit.
UBS said they had made minimal adjustments to their outlook for the company, outside of a 1% reduction in expected cash earnings due to another likely interest rate increase in both Australia and the US.
The broker said Zip was trading on a forward price-to-earnings (P/E) ratio of 15 times, which set it up well to achieve a compound annual growth rate in the high teens.
UBS has a price target of $4.40 on Zip shares, compared with the current $2.24.
