Zip earnings soared 50% in Q2: So why is the stock sinking?

Zip (ASX: ZIP) shares plunged more than 20% on Thursday after Q2 earnings fell short of analyst expectations. For a stock that surged from 30 cents to $3.00 in just over a year, missing earnings expectations is a tough pill to swallow.

Zip shares opened 10.3% lower as the market opened and heavy selling pressure dragged the stock as low as -26% by 10:35 am AEDT.

December quarter highlights

• Total transaction volume (TTV) up 24.8% to $3.4 billion

• Revenue up 20.5% to $269.4 million

• Revenue margin of 7.9% (vs. 8.2% a year ago)

• Cash EBTDA up 50.2% to $35.3 million

• Net bad debts approximately 1.5% of TTV (vs. 1.7% a year ago)

• Active customers up 1.5% to 6.3 million

  • US active customers up 6.2% to 4.22 million

  • ANZ active customers down 6.2% to 2.12 million

Analyst takeaways

"Zip delivered a mixed 2Q25 result with strong US performance for TTV and active customer growth, which we think will be overshadowed today by softer revenue yields in ANZ and cash EBTDA," RBC Capital analysts noted on Thursday.

Q2 cash EBTDA of $35.3 million missed RBC's estimate of $40.2 million by 12.1%. For 1H FY25, Zip’s $67 million in cash EBTDA fell 6.6% short of forecasts — a significant miss for a company expected to be charging into profitability after a tenfold rally in the past 14 months.

Adding to concerns, Zip’s Q2 ANZ revenue yield declined 30 bps year-on-year to 10.2%, despite the rollout of higher-yielding products like Zip Plus.

Despite the sharp selloff, analysts see strong US momentum, potential large merchant signings, and new product launches as key growth drivers for the rest of the year.

Zip reported a solid 6.2% increase in active US customers, which follows nine consecutive quarters of flat or negative growth. In addition, cash margins held steady at 3.6%, within the management's two-year target range of 3.5% to 4.0%.

RBC Capital remains Outperform rated on Zip with a $3.60 target price.

Near-term volatility

Today's earnings update brings about several challenges for Zip over the near-term, including:

• Momentum hit: The stock’s steady 14-month uptrend, marked by shallow and well-supported pullbacks, faces a major test after this sharp one-day selloff.

• Short seller pressure: Short interest has steadily declined to 2.72% (22 Jan) from 3.8% a year ago and April 2023 highs of 10.8%. A weak result could invite renewed short selling.

• Analyst downgrades: Earnings misses often trigger downward revisions to forecasts, target prices, and ratings.

• Unprofitable holders: Zip has fallen to a four-month low, putting many recent buyers in the red. This could lead to selling pressure when the stock nears breakeven.