The Zip Co Ltd (ASX: ZIP) share price has fallen unceremoniously over the past year. How the tides have turned since the golden days of cheap lending.
Retracing the share price of this buy now, pay later provider during the last revolution of the sun tells a painful story. In a single 12-month stint, the once-popular name has morphed from a powerhouse to a pariah — taking the company's shares 81% deep into a desolate abyss.
Yet the company's annual revenues are at all-time highs.
So, could Zip shares rise from the ashes?
Can Diamond bring back the sparkle?
Once upon a time, investors admired Zip — and other BNPL offerings — for their breakneck revenue growth. It wasn't long ago that Zip and Afterpay were duking it out for market attention, both presenting growth figures in excess of 100%.
Profits? They weren't a concern… it was all about how fast could you grow and how much market share could you take.
Fast forward a few years and suddenly profits are… everything. There aren't too many shareholders interested in sitting around another few years for a return. Inflation changed the formula, and now profits right now matter far more.
Unfortunately for Zip shareholders, it looks like the BNPL company is lacking both the desirable traits of the past and the present at the moment.
Despite the efforts made by CEO Larry Diamond and his team, Zip is still a far cry away from producing sustainable profits. Adding insult to injury, Zip's prized growth rates are slowing as it attempts to strip out costs and chart a profitable course.
In the first quarter of FY23, the company reported quarterly revenue growth of 19%. Likewise, its total transaction volume (TTV) increased by 15% year-on-year. The deceleration is dizzying when you compare it to Q1 FY22 — revenue and TTV growth of 89% and 101%, respectively.
In my opinion, it's going to be extremely difficult to slash costs, maintain growth, and turn a profit — all simultaneously — while arguably heading into a period of reduced consumer spending.
Zip shares: solution and the problem
To try and appease shareholders, Zip will need to make massive changes to the cost structure of the business. Or… it can simply raise more capital to fortify its $319.1 million cash balance at the end of September 2022.
While this might tide the company over for a little longer, it also comes at an invisible cost… dilution.
As the chart above shows, Zip shareholders have suffered significant dilution over the years. Between 2019 and now, shares outstanding have nearly doubled. This means the Zip share price would need to be around $6.90 to reflect the per-share value at the end of 2019, not the $3.53 it traded for at the time.
If Larry Diamond and the rest of the management team can pull it off without diluting shareholders into oblivion, I'll be mighty impressed and have the utmost respect for the team.
However, before jumping into Zip shares, I'd wait to see proof of the turnaround.
