Zip Co (ASX:ZIP) Down 31% on a Strong Half, What Did the Market See?

Zip Co US Growth Story Is Working, Investors Fear the Mix Shift

There was a lot of panic selling in Zip Co at the open today, with the share price falling to around $1.90, down 31% after the release of its 1H FY26 result.

What makes the reaction interesting is that Zip actually delivered a strong half, and the numbers point to clear operating leverage.

Here are a few of the headline metrics that stood out:

Total transaction volume of $8.4b, up 34%
Total income of $664m, up 29%
Cash EBITDA up 85%
Statutory NPAT of $52.4m, up 128% year on year

So with volumes scaling and profitability lifting alongside it, the question is, why was the market panicking?

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85% Cash EBITDA Growth

If you look under the hood of Zip’s 1H FY26 result, the story is pretty clear, the US is now the engine of growth, while ANZ is still contributing, just at a much more moderate pace.

Revenue growth also came in slower than transaction volume, and management was pretty explicit about why. The mix is shifting further toward the US, and the US is now roughly 75% of group total transaction volume. With that mix shift, the group revenue margin becomes the key swing factor, not just raw volume growth.

On earnings, the operating leverage was real.

Gross profit for the half reached $292m, up 45%. Scaling revenue did the heavy lifting, and the bad debt line improved, which helped the quality of earnings look stronger as well.

Profitability then inflected sharply. The operating margin stepped up to 18.7% versus 13% in the prior period, because costs simply did not rise as fast as income. Funding also became a tailwind rather than a drag, with a new US$283.4m warehouse facility at a lower margin, plus an Australian $400m ABS deal priced at 1.37%, which was better than prior deals.

So why the anxiety when the headline profitability is surging?

A big part of it comes back to unit economics. Group cash net transaction margin was flat at 3.8%, and US cash NTM slipped to 3.4% from 3.7%. That is where some investors start asking the uncomfortable question: are the unit economics peaking as the US scales?

Zip is basically saying the economics remain solid, but the market can clearly see there is some pressure in the US margin, and bad debts have not disappeared as a risk either. Even if the overall provision line improved this half, investors tend to get jumpy when the US book is doing most of the incremental growth and margins are ticking down.

Then you get to guidance, and this is often where momentum breaks.

For 2H, management largely signalled more of what we just saw in 1H, which is fundamentally not a bad outcome. They reconfirmed:

US TTV growth greater than 40% in USD
Group revenue margin around 8%
Group cash NTM 3.8% to 4.2%

And they upgraded:

Group operating margin now expected to be greater than 18.0% (previously 16.0% to 19.0%)
Cash EBITDA as a % of TTV now expected to be greater than 1.4% (previously greater than 1.3%)

The catch is the psychology. If the market was positioned for a bigger surprise, or a clear step up in 2H beyond what was already implied, a “more of the same” guidance tone can kill the momentum trade instantly, even when the half itself is objectively strong.

So the sell off can make sense through that lens strong result, but investors are debating whether the next leg is about accelerating unit economics, or simply scaling volume while margins hold steady or drift slightly lower.
The takeaway for Zip, in our view, is that the market reaction looks overdone.

Yes, the forward message may have felt less exciting, but if you step back and look at the business objectively, this was a strong result. Revenue is improving, and earnings are improving at a faster rate. A 30% drawdown on the day is significant for a company showing this level of operating leverage.

Re Rate or Value Trap, The Post Result Setup

That said, we understand why some investors got nervous when they looked under the hood.

Revenue margin dipped to 7.9% versus 8.2%, and US cash net transaction margin fell 32 bps. That can raise concerns that scaling in the US comes with take rate pressure, higher competitive intensity, or simply a less favourable product mix as the book grows.

But the bigger signal for us is that operating leverage is clearly starting to show.

Cash EBITDA rose 85.6% on total income growth of 29.2%, with operating margin reaching 18.7%. That is the profile of a platform moving into a higher quality earnings phase, where incremental revenue is translating into materially higher profitability.

From a valuation perspective, it is also starting to look more interesting. Zip is trading on a forward P E of roughly 27 versus a five year average closer to 45. If the company can sustain this earnings trajectory, that gap matters, and it is why we think this is a good time to take a closer look at the stock.