The Zip Co Ltd (ASX: ZIP) share price has seen an enormous amount of pain. Over the past year it's down more than 70%.
But, interestingly, the company has risen by over 40% in the last month. This may beg the question – has the buy now, pay later business seen the worst of the decline?
The higher interest rates have significantly changed the picture for Zip. Not only has it completely taken the heat out of high growth and speculative ASX shares in general, but the economics of buy now, pay later may be impacted in time as their interest costs rise.
Remember, the BNPL players don't operate with much of a profit margin, so higher interest costs could significantly change the long-term outlook of the business.
Latest quarterly update
One of the factors that can negatively impact the share price of a business is if investors believe the company will need to carry out a capital raising to continue to fund its operations until it can reach breakeven.
A capital raising would mean the company's (future) earnings are being split between more shares. Businesses also typically have to do a capital raising at a discount to the share price to make it enticing to investors.
Earlier this week, Zip released its update for the three months to 31 December 2022.
It announced quarterly revenue of $188 million, which was up 12% year over year.
Zip revealed that the cash transaction margin was 2.6% for the quarter, up from 2.2% in the first quarter of FY23, which it said was in line with medium-term targets. Management said this was a great result in a rising interest rate environment. This margin could be key for the Zip share price.
The revenue margin was 6.9%, up from 6.4% in the second quarter of FY22, which reportedly reflected seasonality.
At 31 December, the company had cash and liquidity of $78.5 million, which it said it "expected to be sufficient reserves to support the company through" to cash profitability at the earnings before tax, depreciation and amortisation (EBTDA) level.
A large factor for the improving situation may be pinned on the performance of the US segment.
Zip US achieved positive cash EBTDA in November and December and "is on track to exit FY23 cash EBTDA positive on a sustainable basis." Zip saw credit loss rates improve "substantially to 1.1% of total transaction value (TTV)", down from 2.4% in the first quarter of FY23.
Has the Zip share price bottomed?
My crystal ball isn't working at the moment. But, the S&P/ASX 200 Index (ASX: XJO) saw lows last year during June and October, when fears about inflation and interest rates were particularly elevated. Just the easing of investor pessimism may mean we've already seen the worst for the Zip share price.
The fact that the business is seeing increasing profitability is a good sign, particularly if Zip can show it's getting closer to sustainable operations. But, cash EBTDA is not the same as making a net profit after tax (NPAT).
Analysts are mixed on Zip shares at the moment. According to Commsec, two analysts rate it as a buy, three rate it as a hold and four rate it as a sell.
Zip isn't one on my watchlist, but if I had to guess I'd say it is likely to have already seen the bottom as long as it keeps moving towards cash breakeven.
