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After three consecutive days of gains, shares in Zip Co Ltd (ASX:ZIP) dipped slightly on Tuesday, closing 1.2% lower at AU$2.38. While the S&P/ASX 200 Index (ASX:XJO) stock faced a minor pullback, this hasn’t significantly dented the stock’s remarkable performance over the past year.
As of 18 September 2023, Zip shares were trading at a mere 30 cents each, making today’s price of AU$2.38 a massive leap of 693%. For investors who bought the stock at its low point of 27.5 cents on 20 September, the returns are even more astounding, sitting at 765%. These figures highlight the meteoric rise Zip has experienced in just 12 months.
Is the Rally Over or Just Getting Started?
With such impressive returns, investors are asking whether Zip's rally is running out of steam or if the stock still has room to grow. While replicating the 693% gain in the next year may be unlikely, there are several reasons to believe that Zip can continue to outperform the broader market.
Interest Rates Could Bolster Zip's Growth
One of the main factors working in Zip’s favor is the potential for falling interest rates. BNPL (buy now, pay later) companies like Zip have proven to be highly sensitive to interest rate changes, and a lower rate environment could provide a tailwind for further growth. The US Federal Reserve is expected to announce a rate cut soon, and while Australia’s Reserve Bank (RBA) may keep rates steady until 2025, easing is likely to follow within the next six months.
This shift in the macroeconomic environment could lead to lower borrowing costs for consumers, further boosting Zip’s business as its model thrives in such conditions.
Zip’s Transition to Profitability
On a company-specific level, Zip’s shift from prioritizing aggressive growth to focusing on sustainable profitability has been a significant turning point. The company has now delivered four consecutive profitable quarters, which has helped to bolster investor confidence.
For its full-year financial results in FY24, Zip posted strong numbers, including a 28.2% year-on-year increase in revenue to AU$868 million. The company’s total transaction volume (TTV) also grew by 14% to AU$10.1 billion, while cash gross profit surged by 52.8% to AU$373 million compared to FY23.
Additionally, Zip had AU$80.4 million in available cash as of 30 June, signaling a healthy financial position. Although the market initially reacted negatively to these results, with shares closing down 7.9% on the day, Zip’s stock bounced back the following day with a 13.9% rise.
Outlook: Can Zip Maintain Momentum?
While Zip may not replicate the extraordinary gains of the past 12 months, its focus on profitability, solid financials, and a favorable interest rate environment suggest that the stock still has potential. As Zip continues to refine its business model and expand its profitability, it could remain an attractive option for investors looking for growth in the BNPL space.
