Small Caps | Apr 21 2026
This story features ZIP CO LIMITED.
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The company is included in ASX200, ASX300 and ALL-ORDS
BNPL company Zip Co’s update provides brokers with confidence the company is coping well in an uncertain macroeconomic climate.
- Zip Co posted a 'beat' on March quarter earnings
- US bad debts are low despite tough conditions
- Consumers spending on non-discretionary items
- June quarter guidance upgraded
By Greg Peel
One would be forgiven for assuming the current global macroeconomic environment would be difficult to navigate for “buy now, pay later” services, as increased cost of living pressures lead to an increase in bad debts from consumers requiring to spread the cost of purchases across several repayment instalments.
This would be even more acute in the US, where existing post-covid cost of living pressures had already been exacerbated by tariffs and the loss of healthcare relief prior to the surge in fuel prices.
However, BNPL company Zip Co ((ZIP)) has surprised with its March quarter update, which showed US segment bad debts came in at only 1.86% of total transaction value, up two basis points from the prior quarter, and within management’s assumed bad debt level of 1.75-2.0%.
US total transaction value (TTV) represents 76% of group TTV, with Australia & New Zealand the balance, and it increased 43% in the March quarter, having increased 42% in the December quarter. The US net transaction margin increased 34 basis points to 3.5%.
Given June quarter US bad debt guidance of “less than 1.75%” it appears to analysts the worst is behind Zip Co, and this is being achieved with US TTV growth remaining above 40%.
The resulting margins were good, says Ord Minnett, as were cash earnings of $65.1m, which has led to an upgrade to full year guidance.
Resilience
Company commentary suggests Zip is yet to see any meaningful impacts on the business so far from recent uncertainty in global macro conditions. It appears US consumers are not wildly splashing about the cash on the never-never, rather UBS sees Zip’s exposure to predominantly non-discretionary categories.
Some 40% of TTV is being spent on household goods, 10% on food & beverage, and 6-7% on insurance and utilities, which UBS believes provides a level of defensiveness.
For now, UBS raises its second half US TTV growth forecast from 36% to 41%, but maintains an FY27 growth of forecast 25%, reflecting expectation of a material slowdown due to the weaker global macro outlook impacting consumer spending more broadly.
While the price of fuel shot up five minutes after Trump/Netanyahu bombed Iran, the flow-on effects into the price of everything are only beginning to be felt as the war enters its eighth week, mostly through transportation costs.
The full impact on food prices is still to be felt.
The US Fed was forced to hold off on what would otherwise have been another cash rate cut at its last meeting due to Trump’s tariffs, and is now likely to at least remain on hold, whereas already sticky inflation in Australia has led to the RBA seeming very trigger-happy for more hikes.
Yet, UBS remains comfortable with Zip’s ability to manage net bad debts, even as we enter a period of uncertainty. Zip’s exposure to non-discretionary spend provides a level of resilience, the company’s Pay-in-4 instalment losses are stable and management believes Pay-in-8 losses have now peaked.
Pay-in-4 represents around 75% of TTV and Pay-in-8 some 19%, while Pay-in-2 has just been launched and is so far less than 5%.
UBS expects Pay-in-2 credit quality to be better than Pay-in-4 and Pay-in-8 as a short duration portfolio generally provides Zip with more flexibility than traditional credit to tighten risk settings when needed.
UBS maintains a net bad debt forecast of 1.9% from FY27 onwards as the broker expects Zip to continue to incrementally continue to chase growth in the US and reach the higher end of its net bad debts target range of 1.5-2%.
Ups and Downs
Zip added around 2300 new merchants in the US in the March quarter with merchant growth accelerating to 18% year on year.
However, the US active customer number was down -2% quarter on quarter, which likely reflects a bit of seasonality, Citi suggests, given last year it was down -1% quarter on quarter as well.
Australia & New Zealand TTV growth slowed to 5% year on year and missed Citi’s forecast by -4%, though revenue yield was stronger than expected and receivables growth accelerated.
Ord Minnett notes the A&NZ customer number continues to moderate, down -7.4% year on year.
Cost discipline nonetheless remains, Ord Minnett notes, and this has helped deliver an improved second half earnings outlook with FY26 cash earnings guided to be “no less than” $260m. Zip earned $124.3m in the first half, hence $135.7m or better is expected in the second.
The operating margin improved to 19.4%, largely a function of the improved net transaction margin in a seasonally stronger period for revenue margins.
Ord Minnett further notes the Stripe (eftpos) integration appears to be having an impact, with integrated retailers in the US up 18% year on year to 29k.
Under Control
While there are concerns over the outlook for the US consumer, Zip’s update addresses a number of concerns, Citi suggests, and shows the US can deliver strong TTV growth even after slowing Pay-in-8 growth, with Zip guiding to 40% year on year growth continuing in the June quarter; a sign that consumer health is not an issue.
Given the momentum in the US business, Citi sees the potential for around 10% upgrades to consensus forecasts for FY27 cash earnings, assuming 35% US TTV growth and an Aussie dollar at US$0.72, while the A&NZ net transaction margin is likely to be lower due to higher interest costs (RBA rate hikes).
The key catalyst for Zip remains US segment performance. Macquarie forecasts continued growth in TTV, cash net transaction margin and cash earnings, which will support outperformance. Macquarie expects medium-term growth will be supported by Zip’s attractive unit economics model.
Zip is trading on an 18x forward PE for a 24% compound annual earnings per share growth rate, which UBS views as attractive versus Australian domestic banks on 18x for a 4% EPS CAGR, and relatively in line with BNPL peers Klarna and Affirm.
Ord Minnett suggests on improving momentum on earnings, the stock remains cheap on a forecast 9x enterprise value to cash earnings multiple for FY27.
All four brokers monitored daily by FNArena covering Zip Co retain their Buy or equivalent ratings. The consensus target has increased to $9.00 from $8.65.
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