Zip Co Shares Hit Hard Into The Weekend: What Happened?

Zip Co shares (ASX: ZIP) are coming off their worst day on record, after a coordinated external fraud attack in the United States inflated bad debts and dragged quarterly earnings well below expectations. Heading into the weekend at the foot of the ASX leaderboard with a loss of 29.47%, it’s staggering to think that it looked a lot worse early on. 

In case you missed it, Zip shares opened Friday’s session in freefall, crashing 50.5% in early trade to hit a multi-year intraday low of A$1.025 before some stabilisation drove a 43% bounce off the session low. Such is the maths however that Zip’s share price closed down 29.47% at A$1.46, one of the most volatile sessions in the company’s history.

Zoom out further to the 1 year chart above, and the view does not get much better, with Zip shares down 63.59% over the past twelve months, testing the patience of even the most committed long-term holders.

What Happened at ZIP?

The first-quarter FY27 update contained enough moving parts to justify both the initial panic and the subsequent partial recovery. At the heart of the sell-off was the disclosure of a coordinated external fraud event in the United States, in which bad actors exploited legitimate credentials to open fraudulent accounts and execute transactions that went unpaid.

The episode cost Zip A$10.1 million (approximately US$7.2 million) in a combination of direct bad debts and fraud mitigation operating expenses, and its ripple effects were felt across multiple key metrics.

Net bad debts climbed to 1.97% of Total Transaction Volume (TTV) for the quarter, up from 1.65% in the prior quarter and 1.70% in the fourth quarter of FY26, and meaningfully above the consensus estimate of 1.80%. The result pushed Zip’s loss rate close to the upper boundary of its own stated target range of 1.5% to 2.0%, raising questions about the headroom available should credit conditions deteriorate further or another fraud event emerge.

The earnings impact was direct and material. Group Cash EBTDA came in at $65.0 million for the quarter, representing growth of just 3.4% year-on-year and a 15% miss against market expectations of $76.9 million. Stripping out the one-off fraud costs, underlying Cash EBTDA rose a more respectable 19.5% year-on-year to $75.1 million, missing consensus by a narrower 2%, a distinction management was keen to draw, and one that several brokers acknowledged as context.

The fraud event also temporarily disrupted US customer onboarding during July and August, as Zip tightened its screening protocols to contain the breach. Active customers for the quarter came in at 6.4 million, falling 4% short of consensus estimates of 6.67 million. Total TTV rose 18% year-on-year to $4.60 billion, a 1% miss against the $4.66 billion forecast, while US TTV grew 34.1% in US dollar terms over the full quarter, marginally below the 35% estimate.

Pockets of Positivity

September shifted the tone a little, as once the fraud event was contained and onboarding controls were recalibrated, US TTV growth accelerated sharply to 41% year-on-year in US dollar terms for the month of September alone, suggesting the underlying demand trajectory remained intact. Total revenue for the quarter rose 17% year-on-year to $376.1 million, beating consensus estimates of $369.2 million by 2%, offering some reassurance that the top line had not been structurally impaired.

On guidance, management held firm, reaffirming FY27 targets of $340 million in Group Cash EBTDA, US TTV growth above 30% in US dollar terms, and an operating margin of between 20% and 22%.

Management also guided for US net bad debts in the second quarter of FY27 to come in below the first-quarter level, compared with market estimates of around 1.85% — a forecast that, if delivered, would represent a meaningful normalisation in credit quality heading into the peak Black Friday and Christmas trading period.

Broker Reaction

The broker community reacted fast, as Citi raised concerns about the adequacy of Zip’s US customer onboarding controls, suggesting the fraud event pointed to potential vulnerabilities in the company’s identity verification processes. Jefferies struck a similar tone, noting that markets would need clarity on two fronts: whether the elevated fraud mitigation operating expenses represent a permanent uplift to the cost base, and what structural changes Zip intends to implement to reduce the risk of a repeat incident.

UBS identified net bad debts as the primary operational miss for the quarter, noting that the ratio’s rise to 1.97% was partly a mechanical consequence of the fraud event itself, slower TTV growth in July and August meant the denominator of the bad debt ratio was temporarily suppressed, amplifying the headline rate.

Despite the near-term concerns, UBS maintained its constructive long-term view on the stock, reiterating a discounted cash flow-based valuation target of A$4.40 per share, approximately three times Zip’s closing price on Friday. The broker noted that September’s 41% US TTV growth and the reaffirmation of full-year guidance pointed to management’s confidence heading into the seasonally important December quarter.

What Next?

The central question for markets now is whether Friday’s sell-off represented a rational repricing of structurally elevated risk, or an overreaction to a contained, one-off event in an otherwise healthy growth business. The answer likely depends on which data points one chooses to anchor to.

ZIP has just had it’s own black Friday in the market, but with the Black Friday shopping day, and Christmas trading on the horizon, the most important period of the year for BNPL volumes will feed into the upcoming quarter. Volatility could well continue into the new week, with bulls eager to see a defensible floor, and some stability from which to rebuild. Bears will have other ideas.