Small Caps | 1:35 PM
While Zip Co’s fraud losses and rising US bad debts rattled investors, accelerating growth and unchanged guidance keep analysts positive.
- Zip Co’s 1Q unearths concerns about AI, fraud and rising bad debts
- Underlying performance remains strong: US revenues up 32%
- Momentum in Australia positive despite challenging conditions
- Some criticism emerges, but Buy ratings remain in place
By Mark Woodruff
Shares in digital lender and BNPL payments company Zip Co ((ZIP)) plunged last week after its first-quarter update revealed fraud losses and higher bad debts in the US.
Outside of these two negatives, the underlying revenue growth and cash earnings (EBTDA) performance remained robust.
Management maintained FY27 guidance, signaling confidence in both growth and cost control.
Chief executive Cynthia Scott highlighted stronger engagement ahead of holiday trading, with transactions per customer rising 27% in the US and 14.2% in Australia.
The US remains Zip’s key growth driver, with total transaction volume (TTV) and revenue increasing respectively 34.1% and 32% year-on-year in US dollars.
The US fraud incident cost -$10.1m, while US bad debts of 1.93% exceeded market expectations.
RBC Capital describes the fraud as an organised operation involving real people with social security numbers and bank accounts who paid only the first instalment at checkout.
It’s estimated the loss involved around 96,000 transactions out of 18.8m in the first quarter, representing US$13.4m of the US$2.6bn TTV.
Beyond the incident itself, Ord Minnett believes another failure to meet market expectations and the resulting share price sell-off have undermined management credibility.
This analyst expresses frustration that the July and August incident was only disclosed with the quarterly update, without a detailed market briefing to explain what exactly happened.
While external fraud and tighter controls temporarily slowed transaction volumes and customer growth in July and August, Scott noted TTV growth accelerated in September to 41%.
Describing the fraud incident as a temporary drag on earnings rather than a structural problem, Macquarie adds this TTV momentum has continued into the second quarter of FY27.
UBS, similarly, takes some comfort from indications the fraud appears to have been an isolated incident.
On second consideration, the market appears to share some of this confidence, with Zip’s shares recovering the greater part of losses since the initial response to the fraud disclosure.
Management responded to the incident by blocking certain Pay-in-4 transactions and tightening controls, temporarily slowing transaction volumes and customer growth in July and August.
Despite the prompt reaction, Citi questions whether AI-driven commerce creates new avenues for fraud, requiring structurally higher bad debt assumptions for companies such as Zip Co, along with increased cybersecurity spending.
UBS shares Citi's concern and will monitor whether more sophisticated fraud will require additional investment over the medium term.
Management expects US credit losses as a percentage of TTV to decline in the second quarter and retains its FY27 target range of 1.5%-2%.
In fact, all elements of the FY27 guidance remain unchanged, including group cash EBTDA of $340m, representing 26% year-on-year growth.
How Zip Co generates a return in the US
Zip occupies a distinct niche, targeting US consumers underserved by traditional lenders.
Management targets expansion via merchant partnerships and payment platforms and remains focused on growth, innovation and investment to support longer-term scale.
Customers use Zip to fund purchases online and in stores, repaying through instalments or flexible credit accounts. The company derives revenue from merchant fees, customer account and transaction fees, interest, and payment processing and interchange income.
The US Pay-in-Z platform encompasses Pay-in-2, Pay-in-4 and Pay-in-8, allowing purchases to be split into two, four or eight payments, supporting everyday spending and larger purchases.
Management continues to expand the US offering, with Zip Cash scheduled to launch to selected customers in eligible states during the 2026 holiday season.
Zip's overall strategy centres on attracting customers, increasing repeat usage and expanding distribution while controlling operating costs, fraud and bad debts, allowing revenue growth to translate into stronger earnings.
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