Zip is a buy-now-pay-later platform operating in the US and Australia, earning revenue from merchant fees and customer interest on short-term instalment loans. At A$1.78 versus a fair value of A$1.95, the stock trades 9.6% below fair value. The key question is whether 18 months of rapid margin expansion reflects a permanent structural shift — or a peak that competition and regulation will soon reverse.

Zip is best suited to growth investors willing to tolerate binary regulatory risk over an 18–24 month horizon. The combination of 24% revenue growth, expanding margins, and a decade-long US market runway creates a genuine earnings compounding story — provided the US Consumer Financial Protection Bureau resolves its investigation without forcing a fundamental change to the business model. Investors seeking income or capital preservation should pass.

Zip operates buy-now-pay-later platforms in the United States and Australia, earning merchant fees and portfolio interest when customers split purchases into instalments. The US business — now 68% of revenue — has been the engine of a remarkable turnaround: margins have expanded from 7.9% to 18.7% in 18 months as the company eliminated its corporate debt, compressed funding costs, and scaled volume without proportionally increasing marketing spend.

The first half of FY26 delivered $664 million in revenue and $124 million in operating profit, both ahead of the prior year by roughly 30%. US transaction volume grew 44% in US dollar terms. Credit quality remains best-in-class at 1.7% bad debts — 40% below the peer average — which is the single most important validation of the business model's durability.

The investment case rests on two beliefs: that the embedded distribution advantage from Google Chrome and Stripe is structural (not temporary), and that US regulatory risk resolves at manageable cost. If both prove correct, earnings can compound at 25–35% annually for several more years. If the Consumer Financial Protection Bureau forces fee restructuring, the margin framework breaks. Two binary events — the CFPB investigation and an Australian trademark dispute — are expected to resolve within 12 months and account for the gap between the current price and fair value.

At A$1.78 versus a fair value of A$1.95, the stock is 9.6% undervalued.

What happened?

The first half of FY26 was Zip's strongest reporting period as a profitable business. US transaction volume grew 44% in US dollar terms while bad debts held at 1.7% — a combination that previously seemed incompatible. Operating margin reached 18.7%, up from 13% a year earlier. The driver was not revenue alone: marketing spend stayed flat at 0.4% of transaction volume as Google and Stripe delivered merchant acquisition at near-zero marginal cost.

What's next?

Management has guided for second-half FY26 operating profit broadly in line with the first half, implying roughly $248 million for the full year — consistent with our $247 million estimate. The near-term earnings trajectory is clear; the uncertainty sits entirely in two binary events.

The Australian Federal Court trademark dispute with Firstmac is before the High Court, with a judgment expected between May and July 2026. An adverse ruling would require a rebrand and is estimated to reduce fair value by $0.15 per share. The larger risk is the US Consumer Financial Protection Bureau investigation, active since July 2024 with no resolution date confirmed. A straightforward settlement would be a material positive catalyst; forced fee restructuring would be a material negative. Either outcome is worth an estimated $0.30–$0.50 per share in either direction. A Nasdaq dual listing, filed in November 2025 and carrying a 60% probability of proceeding within two years, is the single largest upside catalyst — potentially closing a portion of the 60% valuation discount to US peers.

The central risk is not credit quality — Zip's 1.7% bad debt rate has proved durable through 44% volume growth and is the most reassuring data point in the model. The central risk is regulatory. The Consumer Financial Protection Bureau issued a Notice and Opportunity to Respond and Advise to Zip in July 2024, covering late fees and credit practices. If the Bureau requires Zip to restructure its US fee model, revenue margin would fall by an estimated 100–150 basis points permanently. That would reduce the terminal operating margin from 14.5% to roughly 10–12%, and fair value would fall to between $1.00 and $1.20. There is no way to model around this — it is a binary outcome that no amount of earnings growth can offset if triggered. The market appears to be assigning a 30–35% probability to an adverse outcome; our model uses 30%. Investors comfortable with that probability and a 18–24 month resolution timeline will find the risk-reward modestly favourable. Those who are not should wait for clarity.