Zip Co Ltd (ASX: ZIP) shares have had a rough run.
The buy now, pay later (BNPL) and digital payments company’s shares are down around 55% from their 52-week high, which shows just how quickly sentiment can shift toward growth shares.
But I think this sell-off could be creating an opportunity.
Zip is not the speculative business it was during the peak of the BNPL boom. The company is now profitable, more focused, and showing strong momentum in its core markets.
For investors comfortable with risk, I think Zip shares could be worth buying after such a large fall.
A different Zip from a few years ago
The Zip story has changed a lot.
During the market’s earlier excitement around BNPL, investors were focused heavily on growth. Profitability was often pushed further into the future.
That is no longer the case.
Zip is now operating in two core regions, Australia and New Zealand, and the United States. Management recently described the business as sustainably profitable, with a leading and profitable ANZ business and a high-growth US business executing strongly in an early-stage market.
That is important because investors are no longer being asked to simply believe in a long-term story without evidence of progress.
The company is also much more focused than it used to be. It has exited non-core distractions and is now concentrating on markets where it believes it has scale and a clearer path to growth.
The US opportunity is the big prize
The main reason I would consider buying Zip is the United States.
Zip serves 4.6 million active customers in the US, compared with 1.9 million in ANZ. It also points to more than 100 million Americans who it believes are underestimated by traditional financial services providers.
That is a huge potential market.
Zip’s pitch is that it can underwrite these customers profitably using its own data and models. The company says more than 98% of US transactions are repaid in full, and that it has underwritten US$25 billion in total transaction volume across 192 million transactions to date.
Of course, lending risk needs to be watched closely. If unemployment rises or consumer stress worsens, losses could increase.
But I like the fact that Zip is showing growth while still keeping credit outcomes within its target range.
The valuation looks interesting
The share price fall also makes the valuation more appealing.
According to CommSec consensus estimates, Zip is expected to generate earnings per share of 10.9 cents in FY27 and 17 cents in FY28.
Based on current pricing, that puts the stock on P/E ratios of around 20 times estimated FY27 earnings and 13 times estimated FY28 earnings.
That does not look expensive to me if Zip can keep growing strongly.
Foolish Takeaway
Zip shares are not for everyone.
This is still a higher-risk ASX share exposed to consumer credit, competition, regulation, funding conditions, and investor sentiment toward growth stocks.
But I think the market may have become too pessimistic after the 55% fall.
Zip is profitable, focused on its strongest markets, growing quickly in the US, and trading on a valuation that could look very reasonable if earnings keep rising.
For patient investors who can handle volatility, I think Zip shares could be a good buy at current levels.
The post Down 55%: Should I buy Zip shares? appeared first on The Motley Fool Australia.
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More reading
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Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.