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The Zip Co Ltd (ASX: ZIP) share price has seen an impressive surge of 147% in the past three months, outpacing the 8.3% gain of the S&P/ASX 200 Index (ASX:XJO). Notably, within the buy now, pay later (BNPL) sector, which faces challenges such as higher interest rate costs, reduced global growth opportunities, increased regulation, and economic challenges for customers, Zip has demonstrated positive indicators that may contribute to its share price recovery. This performance is of particular interest to investors with a focus on both BNPL and ASX communication stocks, as Zip's resilience and positive factors come to the forefront amid a dynamic market landscape.
Ongoing Growth:
Zip continues to achieve robust top-line growth despite industry challenges. In the quarter ending December 2023, the company reported a year-over-year transaction volume growth of 8.5% to $2.8 billion, with a 4.1% increase in transaction numbers. The revenue margin improved from 7.1% in the second quarter of FY23 to 8.2% in the second quarter of FY24, resulting in a 26.1% YoY increase in group quarterly revenue to $225.6 million. Key enterprise merchants, such as Amaysim, Bang & Olufsen, National Geographic, and RM Williams, were launched during this period, and a partnership with Google Pay in the US commenced.
Improving Profitability:
Zip, previously focused on rapid growth, is now prioritizing profitability, especially given the higher cost of debt due to increased interest rates. In the December 2023 update, the company reported an improvement in cash transaction margin to 3.5%, up from 2.8% in the FY23 second quarter. US bad debts were noted to perform well, with monthly cohort loss rates below the target range of 1.5% to 2%. Zip aims to achieve positive group cash earnings before tax, depreciation, and amortization (EBTDA) in the second half of FY24 and for the entire fiscal year.
Balance Sheet Strengthening:
In December 2023, Zip completed new funding facilities to fortify its balance sheet, simplify the capital structure, and support ongoing profitable growth. This included a new $150 million corporate debt facility to refinance existing corporate debt. Efforts to reduce the value of convertible notes and refinancing receivables funding in the US and Australia have contributed to balancing the sheet.
Final Thoughts:
While Zip is taking measures to navigate challenges and drive growth, the sustainability of profitability will be crucial for its share price recovery. The company's ability to prove consistent profitability and address industry headwinds will likely play a significant role in shaping its future performance. Despite positive initiatives, the author expresses caution about owning Zip in their own portfolio.
