This week, I have been chatting with Zip Co Ltd (ASX: ZIP) co-founder and chief operating officer Peter Gray about the buy now, pay later (BNPL) provider's performance and its profit goal progress.
The first part, covering Zip's performance in the face of higher interest rates and the cost of living crisis, can be found here.
In this final part, we're going to be looking at the versatility of the Zip platform and those all-important profit goals.
Pulling all the right levers
When Zip released its first-half results last month, it surprised many in the market by delivering credit loss improvements despite the tough economic environment. Gray was very happy with the half and believes Zip remains well-placed even if the economy worsens. He explained:
Despite a rising interest environment, higher revenue margins and improved credit losses drove a 20 basis points lift to NTM to 2.5%, a great result, and now in line with our target range. With US credit losses on a cohort basis improving by around 150 basis points year on year, we are very well-placed in an economic downturn.
One of the keys to the company's success has been the levers it can pull to control its losses. I asked how easy it is for Zip to respond to changes in the economy. The COO advised:
Zip's product construct and short capital recycling profile mean that we are able to drive changes in response to the external environment very quickly. The improvement to NTM we have delivered over the last nine months confirms the levers we have at our disposal and the control we have over our unit economics.
Profit goals
Based on the performance of the Zip share price, it seems the market has doubts over the company's ability to achieve its profit goals despite its strong first-half performance.
I asked Gray how these targets are progressing, and the co-founder revealed that he believes the company is on track to achieve its targets. He also highlights the company's sufficient liquidity and funding to see it through to this point and then expects to deliver profitable growth in 12 months' time. Gray commented:
We are very pleased with the improvement in Core Cash EBTDA, which was better by $27m year on year and is expected to improve again by up to 50% in the second half. With this trajectory and additional cash inflows from RoW business sales and closures expected during 2H FY23, we remain confident that we have sufficient liquidity and funding to see us through to group positive cash EBTDA during H1 FY24. This outcome will provide a very strong platform for the business to then accelerate, delivering profitable growth for the second half of FY24 and beyond.
Should you invest?
As I mentioned yesterday, one leading broker that believes the market has got it wrong with the Zip share price is Shaw and Partners.
It recently reaffirmed its buy rating with a $2.02 price target, which implies huge upside over the next 12 months.
The first part of Peter Gray's exclusive chat with The Motley Fool Australia can be found here.
