In recent months, the Zip Co Ltd (ASX: Z1P) share price has been heavily sold off.
The co-founder of Zip, Larry Diamond, has revealed some choices that the buy now, pay later (BNPL) business has made to improve the situation. He's also commented on the market's punishment of his business.
The Zip share price has fallen by 81% in the past year. That's despite the 18% recovery from the new 52-week low of $1.40 reached earlier this week.
The Zip share price finished Friday's session at $1.60, up 1.59% for the day.
Focus on profitability
Talking to the Australian Financial Review, Diamond said that Zip has started reducing the credit limits for customers already using Zip. The company has also raised "the bar" for first-time customers. These changes were made late last year.
In the company's HY2022 results, Zip said that its cash transaction margin declined to 2.1%, down from 3.7% in HY2021. This was because of rising bad debt costs due to credit headwinds. Also playing a role was the increased weighting towards the rest of the world.
It's addressing its risk decision-making policies and collections and recoveries processes to "immediately" address credit performance.
Zip is expecting its cash cost of sales as a percentage of total transaction value (TTV) to be 3.5%–4%. It is optimising risk rules to manage credit losses to management's target of below 2%. It aims to maintain growth and deliver lower-cost processing through scale efficiencies and alternative repayment options, as well as driving lower-cost funding.
Diamond said to the AFR:
We have tempered growth expectations, so we can improve our bad debt figures.
We did that at the onset of COVID in 2020, adjusting the portfolio to respond to changing conditions in real-time to restrict first-time customer volume. As a result of what we are seeing in the US and Australia, we have adjusted approval levels and limits for existing customers — we have taken the decisive action.
Reaction to the hammering of the Zip share price
Zip shares are down 63% in 2022 alone. This has been tough for morale at Zip Co, with lots of staff paid in shares and equity also being used to pay for global growth.
Diamond said:
It looks violent and vicious but as leaders of the business we do have to look around us, to what is happening with the stock and change course accordingly.
We are long-term owners and long-term operators of the business, but certainly, we feel the pain with our shareholders, particularly retail shareholders, and staff who are also shareholders. We are all aligned. We have had to pause, to reflect and change course accordingly.
What do brokers think of the Zip share price now?
Opinions are very mixed on the Zip share price.
UBS recently downgraded Zip shares to a sell with a price target of just $1. That implies a decline of a further 37.5%. Lower profitability and higher interest rates raise more uncertainty. The broker says it expects it to take longer for Zip to stop making losses.
But then there's Ord Minnett with its price target of $4. That implies a potential rise of about 150% over the next year. The broker likes Zip's proposed deal to buy Sezzle Inc (ASX: SZL).
