Zip Co falls 35% in a day as bad debt fears overshadow 86% earnings growth

A strong first-half result with 29% revenue growth and expanding operating margins was overwhelmed by market concern over rising bad debts, sending Zip Co down 35% in a single session even as several fund managers argue the selloff has left the stock deeply undervalued.

23 Jul 2026 · 5 min read

Zip Co Ltd (ASX: ZIP) delivered one of the more jarring disconnects between operating performance and share price reaction anywhere on the ASX through early 2026. LSN Capital Partners set the scene in January, noting Zip had de-rated 40% since September 2025 despite delivering a strong first-quarter earnings update and upgrading guidance, as investors priced in headwinds from higher Australian interest rates, a stronger Australian dollar, and ongoing uncertainty around US regulation, even as US bad-debt disclosures and holiday-period consumer data suggested operating conditions remained supportive.

A strong result meets a bad debt scare

The disconnect reached its sharpest point in February 2026. Blackwattle Investment Partners reported Zip fell 27.9% despite delivering a strong first-half result and FY26 guidance just 2% below consensus, with revenue and Cash EBITDA growing 29% and 85% respectively, supported by solid Black Friday and Christmas trading across both Australia and the US, and operating margins expanding 580 basis points to 18.7%. QVG Capital described the market's reaction to the modest miss as unforgiving, noting the stock fell 35% in a single day, arguing that lending businesses which report higher bad debts simply do not get the benefit of the doubt regardless of the underlying growth story.

Although the miss was modest, lending businesses that see higher bad debts do not get the benefit of the doubt and the stock was off -35% in a day. At current prices, ZIP is on approximately 6x forward pre-tax earnings. Should bad debts plateau or growth be sustained at current levels then ZIP will rip.

QVG Capital, Monthly Report, February 2026

Management points to customer mix, not credit deterioration

Both LSN Capital Partners and Pengana Capital Group described the bad debt increase as being driven primarily by a change in customer mix rather than any broader deterioration in credit quality, with Pengana noting Zip grew earnings 86% in the same period but that February "was not a month for nuance given global skittishness." Ausbil Investment Management, which continues to hold the stock, said the result missed by not much and that the market's concern over bad debts came amid an otherwise pretty good reporting season, while a proposed Trump administration cap on credit card interest rates added a further layer of sector-wide uncertainty that Solaris Investment Management said weighed on sentiment despite a low probability of implementation and limited direct relevance to the buy-now-pay-later model.

A value case emerges from the rubble

Blackwattle Investment Partners argued the market had miscategorised Zip entirely, caught between negative sentiment toward technology stocks on AI disruption fears and a broader rotation out of higher-multiple growth names, neither of which the fund believed applied to Zip's business model. The fund characterised Zip's buy-now-pay-later offering as fundamentally a payments and consumer finance product embedded at the point of sale, with competitive advantages from its merchant network and proprietary credit decisioning rather than being pure software, and at roughly 12 times FY27 estimated earnings, described it as one of the most compelling value opportunities on the ASX.

Its BNPL offering is fundamentally a payments and consumer finance product embedded at the point of sale, with competitive advantages stemming from its merchant network and proprietary credit decisioning, rather than being 'pure software'... it is far from expensive, currently ranking as one of the most compelling 'value' opportunities on the ASX.

Blackwattle Investment Partners, Monthly Report, February 2026

What managers are watching next

With QVG Capital pointing out that Zip could "rip" if bad debts plateau or growth is sustained at current levels, and LSN Capital Partners continuing to monitor portfolio quality closely given the market's low tolerance for credit volatility in this business model, the key signposts fund managers are tracking are whether the next quarter's bad debt figures stabilise, continued execution against an active buyback, and whether US growth, still the primary driver for Zip, continues to hold up against regulatory and interest rate uncertainty.