Down 60% since late July, can Zip shares really 'emerge stronger from challenging times'?

The Zip Co Ltd (ASX: ZIP) share price finished today's trading session in the red, down 0.78% at 64 cents. In comparison, the S&P/ASX All Ordinaries Index (ASX: XAO) was up 0.5% to 7,187 points.

Zip shares have dropped a hefty 58% since late July, underlining what has been a year from hell for Zip shareholders.

But at last week's annual general meeting (AGM), CEO and managing director Larry Diamond sought to reassure those still invested in the ASX buy now, pay later (BNPL) provider.

Diamond said the company's "refreshed strategy" of pivoting from growth to profit was working, and the future was bright.

In his AGM address, Diamond said the past 12 months had made it clear that "a focused, agile business, guided by its purpose and mission, can emerge stronger from challenging times".

Zip to become 'a very profitable business'

Diamond went on to explain how Zip could emerge stronger from these tough economic times:

We believe Zip's differentiated business model will prove resilient in the current operating environment, when coupled together with our innovative products, and position us well to continue to grow market share.

We have simplified the business following adjustments to strategy, underlying monthly cash burn is
improving and we are well funded, with approximately $141 million in available cash and liquidity. We are confident that we have the balance sheet to fund the company through to cash EBTDA profitability.

We have clear medium term targets we are driving the business towards as we scale. Revenue as a percentage of TTV is targeted at 7.0% to 7.5%. Cost of sales as a percentage of TTV targeted at 4.0% to 4.5% and we expect to deliver a cash transaction margin of 2.5% to 3.0%.

He said achieving these targets would deliver "a very profitable business".

As we reported last week, Zip expects to turn cash EBTDA (earnings before taxes, depreciation and amortisation) positive as a group in the first half of FY24.

The key to that is getting Zip's United States business cash flow positive. Diamond said at the AGM he expected this to occur by the end of FY23.

The US market is 'critical' to success

Diamond told shareholders that building scale in Zip's core markets was "critical" to the business's future success and the primary reason why he relocated to the US recently. He added:

While our near-term focus on profitability has tempered our top-line growth rate, the continued growth of the business across key metrics in the face of external challenges, reflects the incredible opportunity that exists.

In the US, the addressable market is estimated to be over US$10 trillion and BNPL penetration is still
under 2%, including just 4% of e-commerce and 1% of in-store spend. This demonstrates the sheer size, and early stage of the BNPL opportunity that we are positioned to capture.

How is Zip overcoming inflation headwinds?

Diamond outlined how the company was dealing with rising inflation and interest rates. He said Zip was "well-placed with its unique product offering and business model … to deliver results despite challenging external conditions".

With interest rates rising we are strongly focused on how we maintain margins in this environment. Our product construct and repayment velocity mean that the US business in particular is well-placed to
mitigate interest rate rises, with any 25 basis point rise in base rate only impacting cost of funds by ~2
basis points on a per transaction basis.

At a time of heightened inflation, we believe our product offering becomes even more important to consumers who are looking to manage their monthly cashflows … It's also a real necessity for merchants to drive conversion at the checkout and we continue to deliver value by driving new and repeat customers and increased order values.

Zip provided an investor presentation at the meeting. The Zip share price is down 85% in the year to date.