The Zip share price: Has it bottomed out?

Should investors buy Zip shares now, later or never?

| More on:
Little girl looking down trying to zip up her pink windcheater.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Buy now, pay later operator Zip has sunk like a stone amid higher interest rates
  • But, it’s still reporting revenue growth, while climbing towards cash breakeven
  • Analysts are mixed on whether Zip shares are a buy

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.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Zip Co. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on BNPL shares

A woman sits back and enjoys the view from a paraglider, indicating share price lifts for ASX travel and adventure shares
BNPL shares

Up 71% in 3 weeks, have Zip shares topped out?

Despite the stellar run higher, Zip shares are still trading at a fraction of their February 2021 highs.

Read more »

A woman sits on a chair smiling as she shops online.
BNPL shares

Why is the Zip share price the best-performing ASX 300 stock so far this year?

The best-performing ASX 300 stock of 2024 so far is an unlikely hero.

Read more »

A happy girl in a yellow playsuit with a zip gives the thumbs up
Share Gainers

If I'd put $5,000 into Zip shares on 9 October, here's what I'd have now!

The stars have been aligning for Zip shares.

Read more »

woman using affirm to pay
BNPL shares

Up 288% in 6 months, Zip share price tipped for more outsized gains

Zip shares have rocketed 288% in just six months.

Read more »

A businessman stacks building blocks.
BNPL shares

Up 93% since October, why are Block shares marching ahead again on Friday?

ASX 200 investors have been snapping up Block shares.

Read more »

A man wearing glasses and a white t-shirt pumps his fists in the air looking excited and happy about the rising OBX share price
BNPL shares

Zip share price up 58% in 7 trading days! What's going on?

This BNPL provider has been on fire recently. But why?

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
BNPL shares

Shares sold: Why Zip is under fire from its own shareholders

Some Zip investors had their shares sold without their knowledge.

Read more »

Sad woman with her hand on her head and holding a credit card.
BNPL shares

Zip share price tumbles 9% despite explosive first-half growth

Zip had a strong half and delivered a big improvement in key metrics.

Read more »