Zip shares are down 30% today. Is it time to be greedy?

Warren Buffett famously advised investors to "be fearful when others are greedy and greedy when others are fearful."

And there is certainly plenty of fear surrounding Zip Co Ltd (ASX: ZIP) shares on Friday.

The buy now, pay later provider's shares plunged as much as 50% to $1.03 following the release of its first-quarter trading update.

They have since recovered some ground but remain down around 30% to $1.45 at the time of writing.

So, is this an opportunity to follow Buffett's advice and be greedy? Here's what I think.

What's gone wrong for Zip?

There were some encouraging figures in Zip's latest update, but investors appear particularly concerned about its credit performance and an unexpected fraud incident.

During the quarter, Zip identified an external fraud event in the US involving individuals using legitimate credentials to open accounts and make transactions that went unpaid.

The incident cost the company $10.1 million and temporarily slowed transaction and customer growth as management introduced measures to contain it.

There was also an increase in bad debts. Group net bad debts rose from 1.65% of transaction volume a year ago to 1.97%, with US bad debts reaching 1.93%.

That is getting close to the top of management's target range of 1.5% to 2%.

And while total income increased 17%, cash earnings grew just 3.4% to $65 million.

I think this combination helps explain the market's reaction. Investors want to see Zip translating its rapid growth into stronger profits. Higher credit losses and unexpected expenses make that more difficult.

Why I think there's an opportunity

Despite these concerns, I actually found plenty to like in the announcement.

The US business continues to grow strongly, with transaction volumes increasing 34.1% and revenue rising 32% in local currency.

I was encouraged by the fact that existing American customers are using Zip more frequently. Transactions per customer increased 27% compared with the previous corresponding period.

That suggests Zip is becoming a more established part of how its customers manage their purchases. And importantly, management reported that US transaction volume growth accelerated to 41% in September as the fraud-related disruption eased.

Excluding the $10.1 million fraud expense, group cash earnings would have increased 19.5% to $75.1 million.

Zip also reaffirmed its FY27 guidance, including cash earnings of $340 million, representing 26% annual growth. I think that's encouraging given the uncertainty surrounding today's announcement.

Would I buy Zip shares today?

At $1.45, I think the Zip share price could be offering patient investors an attractive opportunity.

The US market remains enormous, and Zip has demonstrated that it can grow its customer activity and merchant network.

The biggest question for me is whether it can sustain that growth while keeping credit losses under control.

Higher interest rates and pressure on household finances could make that challenging, particularly if bad debts continue rising. I would also want to see evidence that the fraud incident has been fully contained.

But if management delivers on its guidance and improves margins, I think today's sell-off could eventually look excessive.

Foolish takeaway

I think Buffett's advice is worth considering today. There are legitimate reasons for investors to be concerned, and I wouldn't be surprised to see further volatility in Zip shares.

But the company's underlying growth story remains promising, particularly in the US.

For investors comfortable with the risks and prepared to look beyond the next few quarters, I would be happy buying Zip shares following today's extraordinary sell-off.

The post Zip shares are down 30% today. Is it time to be greedy? appeared first on The Motley Fool Australia.

Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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