Zip Co Limited

The Business

Zip operates two divisions: a US buy now, pay later business that now generates 76% of total transaction volume, and a smaller, mature Australian and New Zealand operation. The US model splits revenue between merchant fees and consumer fees, a two-sided structure that captures roughly 8.1% of every dollar transacted, well above the 2-3% pure payment processors typically earn. Zip funds its receivables book through securitisation (selling pools of loans to warehouse lenders) rather than corporate borrowing, meaning it carries no traditional debt but remains exposed to funding market conditions.

Recent Performance

The stock has re-rated as profitability proved durable, with cash EBITDA margin expanding from 15.7% to 20.0% over the past two years while revenue grew 25% in FY26, a pace already decelerating to a forecast 20% for FY27. Management has beaten every guidance target set since the turnaround began. That combination, sustained growth alongside expanding margins, has pushed the market's implied valuation multiples toward levels normally reserved for larger, more established buy now, pay later peers.

Outlook

Revenue growth is expected to decelerate over the next few years as the US business matures, while cash EBITDA margin is likely to peak in the medium term before compressing toward a lower terminal level as bad debts and bank fees, which scale with transaction volume, grow faster than revenue. The margin trajectory beyond the near-term peak matters more to the long-run outlook than the headline growth rate, because it is the terminal margin assumption that carries the most weight in any credit-sensitive lending model.

Key Risks

A US credit downturn that pushes bad debts materially higher would erode a large share of current cash EBITDA by reversing the operating leverage that now drives margin expansion. This is the single largest risk to the thesis, because Zip's underwriting model has never been tested against a weaker US labour market. Competitive pressure from larger, better-capitalised players such as Affirm and Klarna could also compress Zip's revenue take rate toward levels closer to the broader peer group over time. Separately, a sustained slowdown in US transaction volume growth would stall the same operating leverage mechanism that has driven margin expansion over the past two years, since customer growth already lags transaction volume growth, indicating that deepening usage per existing customer is doing more of the work than new customer acquisition.

What to Watch

The thesis-defining event is the completion of Zip's rated asset-backed securities deal in the September quarter of 2026, which should confirm a meaningful reduction in funding costs.

• Sep-Oct 2026 US ABS deal close — confirms a reduction in funding costs for the US receivables book.
• Feb 2027 1H FY27 results — first test against management's full-year EBITDA guidance.
• CY2027 Potential US dual listing — could shift how the market values the stock if it proceeds.

Company Description

Zip operates through two main divisions. The US business, contributing 76% of group transaction volume, has become the primary growth engine, generating $910 million of revenue in FY26 on transaction volume of roughly $12.7 billion. The Australia and New Zealand division is the smaller, mature counterpart, contributing $437 million of revenue with modest single-digit growth. Both divisions run the same core model: Zip pays merchants upfront for a customer's purchase, then collects instalment repayments from the customer, earning fees from both sides of the transaction. Interest income on outstanding balances makes up the majority of group revenue, alongside merchant service fees.

Where the Growth Is

The US buy now, pay later segment is the growth story, contributing 76% of group transaction volume and growing 42.5% year-on-year in local currency terms, well ahead of the broader US instalment lending market. That pace is decelerating, and current forecasts assume it settles into a lower range over the next two years before slowing further as the business matures. How much of that deceleration actually plays out is one of the more important open questions in the thesis, because a large share of the business's future earnings power still rests on the durability of US expansion.

Competitive Position

Zip's advantage lies in credit decisioning for customers that larger, better-capitalised competitors such as Affirm largely avoid: low-to-middle income Americans. Using AI-assisted underwriting, Zip achieves a 98% repayment rate on this cohort, a track record built on years of data that is not easily replicated. That two-sided fee structure lets Zip earn roughly 8.1% of transaction value, several times what pure payment processors capture, and provides a buffer competitors without the same underwriting depth cannot match. Distribution through Stripe and Google Pay integrations lowers customer acquisition costs without requiring Zip to build its own merchant network from scratch. This advantage looks durable for roughly three to five years, not indefinitely: competitors are accumulating their own underwriting data, and the moat is likely to narrow as the market matures rather than remain exclusively Zip's.

Management & Capital Discipline

Management has funded growth from the balance sheet rather than diluting shareholders, and initiated a $50 million buyback in FY26. No dividend has been paid since the turnaround began, with the first payout not expected for several years, prioritising reinvestment in US expansion over returning capital early. Every FY26 target set by management, on earnings, on margins, on US growth, was exceeded. The honest observation most coverage glosses over: this team has never had to manage the business through a genuine credit downturn or recession, so its capital discipline and underwriting confidence remain unproven under stress.

Financial Position

Zip carries no corporate debt. Its receivables book is funded through non-recourse securitisation, meaning losses on that book do not flow back to the parent company's balance sheet beyond the equity already invested. The group holds roughly $203 million in cash and $247 million of total available liquidity, sufficient by our estimate to absorb well over a year of stress even in a severe downturn scenario. Return on invested capital sits at roughly 9.5% currently, rising toward 10% over the coming years, below the return threshold typically required to compensate for the credit risk embedded in the loan book, meaning the business does not yet generate returns clearly above what shareholders require, though the gap is narrowing.