Zip Co earnings surged 58%. Luke Laretive says US transaction volumes are the story to watch

Cash EBTDA is the gaudiest number, up 57.9% to $268.9 million, while the FY27 earnings guidance was well beyond UBS estimates at $340 million.

While all of these numbers are impressive, Seneca Financial Solutions Portfolio Manager Luke Laretive says its the transaction volumes, particularly in the US, that is powering Zip’s growth. 

"The first major upside driver is the US. Zip has a significant runway there, and continued transaction-volume growth above 30% would create substantial earnings growth if revenue yields and credit performance remain stable," Laretive says.

To understand what the announcement means for investors, I spoke with Laretive about what stood out, the risks facing Zip's expansion in the US, and why the outlook provides an encouraging investment case.

Key Results FY26

Do you currently hold ZIP and what is your rating?

Buy. We hold overweight positions in both the Seneca Australian Shares Fund and the Seneca Australian Small Companies Fund.

What matters from the results?

Transaction volume creates a loan book. Those transactions and that loan book generate revenue, but Zip has to fund it, absorb the losses from customers who don’t repay, and cover the banking and data costs associated with each transaction. On top of that sits the corporate cost base, which Zip has to carry regardless of how much volume it processes. The knack has always been the same: grow the loan book quickly enough to dilute the overheads and reduce funding costs, without compromising credit quality.

Zip grew transaction volume by 27% this year, which is a big part of why the stock has responded so strongly. But anybody can hand out free money - the knack is getting it back.

For every $100 of transaction volume, Zip generated $8.10 of revenue. It incurred $1.30 of interest expense, $1.77 of bad debts and $1.17 of bank fees and data costs, leaving $3.86 of cash gross profit.

From there, Zip spent $0.34 on marketing, $1.23 on salaries and approximately $0.70 on IT and other overheads. That left $1.61 of Cash EBTDA, up from $1.30 last year.

The most important feature of the result was the operating leverage. Transaction volume grew 27%, and revenue grew 25%, while operating expenses increased by only 11%. Cash EBTDA consequently grew 58%.

Almost all the improvement in unit profitability came from spreading salaries, marketing and technology costs across a much larger volume base. FY27 guidance calls for $340 million in Cash EBITDA and an operating margin of 20–22%, so the next leg of earnings growth is expected to come from applying those margins to a larger business.

How do those outcomes affect the outlook?

Before this result, Zip was trading at roughly half the forward PE of its US-listed peer Affirm. We think that discount can narrow if Zip continues to meet or beat guidance and sustains the growth it has generated in the US over the past 12 months.

The key milestones over the next year are US transaction-volume growth of more than 30%, revenue yield holding at around 8%, continued discipline on bad debts, and delivery of the $340 million Cash EBTDA target.

If Zip achieves those targets, earnings should continue to grow materially faster than revenue, while a stronger record of execution could also support a higher valuation multiple.

What should investors be paying attention to as the story unfolds?

The second is further operating leverage. Salaries, technology and corporate overheads should continue to grow more slowly than transaction volume. Lower funding costs or further efficiencies would provide additional upside.

The main risk is credit. Accelerating originations is only valuable if Zip maintains underwriting discipline and recovers the funds. A material increase in bad debts would quickly absorb the benefits of higher volume.

The other risk is competition in the US. Competitive pressure could reduce revenue yields while simultaneously forcing Zip to spend more on marketing and customer acquisition. That would weaken both sides of the operating-leverage equation.

What could you be wrong about?

The bigger uncertainty for me is competition. Zip has a substantial growth opportunity in the US, but I could be wrong about how much of that growth it can capture without sacrificing revenue yield or increasing marketing expenditure. If competitive pressures increase both revenue and customer acquisition costs simultaneously, earnings may not scale as quickly as we expect.