Well, things seem to be going from bad to worse for the Zip Co Ltd (ASX: ZIP) share price. Last week alone, the ASX's largest buy now, pay later (BNPL) share plummeted from 59 cents a share to 52 cents by the end of the week. That's a drop of almost 12%.
Today, it isn't getting any better for Zip with the company losing another 3.88% at present, putting the share price at 49.5 cents.
In 2023 so far, Zip has now lost around 11% of its value.
But over the past 12 months, it's even worse. Since February 2022, Zip shares are now down by 76%. And we won't mention the losses investors have endured since 2021 when Zip shares were going for more than $12 each:
This latest chapter in this rather sad story came just last week. Investors didn't seem impressed with the latest earnings report the BNPL company posted.
As we covered at the time, these earnings saw Zip post a 19% surge in revenues over the six months to 31 December 2022 to a record $352 million. Net margins were up and credit losses were down. Zip also posted a cash gross profit of $12.7 million, up 20% over the prior period.
However, Zip also posted a core cash earnings before tax, depreciation and amortisation (EBITDA) loss of $33.2 million. That was an improvement over the prior loss of $60.5 million.
Zip's bottom line was also in the red, with an overall loss after tax of $242.5 million.
Investors didn't respond well to these earnings, as last week's share price performance shows.
But perhaps this means that the Zip share price is finally cheap enough to buy.
Is the Zip share price cheap enough to buy?
Well, Zip is a hard company to make an accurate call of valuation on. For one, it's not yet profitable. Most investors like to value a company on how much profit it makes. That's why we use metrics like the price-to-earnings (P/E) ratio when working out how much to pay for a share.
Zip doesn't yet make money on its bottom line, so we have to take something of a leap of faith. If Zip is never destined to become profitable, obviously its shares aren't worth much. So we have to decide when the company is likely to make a profit — and how sustainable these profits might be — before we can come up with a proper valuation.
In the latest earnings report, Zip founder and global CEO Larry Diamond sounded very upbeat on Zip's path to profitability. Here's some of what he said:
Zip continues to accelerate its path to profitability … We continue to streamline our business, with Cash EBTDA used in core markets and corporate costs improving by $27.3m to ($33.2m) for the half.
We expect this to improve further again in the second half of FY23 and this very strong result has us well and truly on the path to positive group cash EBTDA during HY24.
If Zip can keep its revenues growing at close to 20% per annum, as well as keep its costs down and margins up, today's share price could prove to be reasonable. Zip's current market capitalisation is sitting at just under $396 million. That's almost bang on the revenue it brought in over the half.
Tossing coins
But this is still a risky investment in my view. If Zip's margins fall, or its revenue growth stalls over the next year or two, the company will be in a world of worry.
And there are a lot of variables to consider in that equation. Perhaps BNPL services become even more regulated, or investors lose their enthusiasm for this payment method. Perhaps competition heats up again and Zip loses market share to other players.
BNPL is still an industry in its infancy. And that makes it very difficult to predict how it might fare over the next five or ten years, which is the kind of timeframe investors would be thinking about when making an investment.
So Zip shares are looking cheap today. But this is merely reflecting (in my opinion) the high level of risk that betting on this company's future profitability entails. In my view, this one could go either way. And for me personally, I don't like to flip coins when it comes to the share market.
