The Zip Co Ltd (ASX: ZIP) share price is down 30% after giving a disappointing FY27 first-quarter update.
Zip is one of the largest buy now, pay later businesses with operations in Australia and the US.
Fraud
The company said that in the US, it identified and contained an external fraud event involving coordinated individuals establishing new accounts using legitimate credentials to execute unpaid transactions.
This fraud impacted total transaction volume (TTV) and new customer growth in July and August, and resulted in US$7.2 million (A$10.1 million) of cash operating expenses.
Zip said that US TTV strengthened in September, with TTV increasing 41% (in US dollar terms) year on year, with positive momentum continuing in October. It has notified the relevant authorities and lodged a claim with its insurer.
FY27 first-quarter
The company said that overall TTV grew 18% to $4.6 billion, while USS TTV increased 34.1%.
Total income increased by 17% to $376.1 million, with the revenue margin maintained at 8.2%.
Its net bad debts significantly increased to 1.97% of TTV for the FY27 first quarter, up from 1.65% in the first quarter of FY26. US net bad debts were 1.93%.
Zip forecasts that US net bad debts as a percentage of TTV will be lower in the second quarter of FY27 than the first quarter, but remain in the top half of its 1.5% to 2% target range.
Zip’s cash net transaction margin (NTM) was 3.8% for the quarter, down from 4% in the first quarter of FY26.
Cash EBTDA (which is EBITDA but with interest included) rose 3.4% year on year to $65 million, which includes $10.1 million of operating expenses relating to an external fraud event in the US. Excluding those costs, adjusted cash EBTDA was $75.1 million, up 19.5% (or up 28.7% assuming the Australian dollar to US dollar exchange rate hadn’t changed).
Active customers increase by 0.1% overall year on year to 6.4 million, but was down 1.7% quarter on quarter. Growth in the US was offset by a decline in Australia.
Merchants increased 10.4% year on year, but it declined 0.8% quarter on quarter following the exit from New Zealand.
Outlook for the Zip share price
The company reconfirmed its guidance for FY27. It still expects US TTV growth of more than 30% in US dollar terms, balancing profitability and loss performance.
The cash net transaction margin is expected to be between 3.8% to 4% with a US net bad debt target range of between 1.5% to 2%.
Group cash EBTDA is expected to be $340 million, up 26% year on year.
This is a painful update and it was disappointing to see that fraud slipped through the company’s systems. Hopefully it will strengthen its processes to ensure that can’t happen again.
It’s now down more than 60% in the past year. Buy now, pay later companies are not the type of sector I’d invest in, but it could be undervalued at this level if it’s able to deliver the US TTV growth and total profitability it expects, though that’s not guaranteed.
I’m looking at other ASX growth shares instead.
