The Zip Co Ltd (ASX: ZIP) share price is up 12.1% over the past five trading days.
Zip shares finished yesterday's session at 55.5 cents apiece, up 0.91%.
While it's nice to see a green trajectory for the maligned ASX BNPL share, Zip has been in a state of purgatory for a long, long time.
Is this welcome bump merely a blip or the start of new upward momentum for the Zip share price?
Let's look into it.
Zip share price stabilises in 2023
It's strange writing a headline about a share price pretty much doing nothing for a period.
That's not usually newsworthy.
But following a catastrophic two-year tumble in the Zip share price, a standstill actually looks positive.
It indicates the company may have finally stopped the bleeding.
Over the first five months of 2023, the Zip share price has dipped by 0.9%.
What's going on with the Zip business?
Zip shareholders are waiting for the company to get its house in order following a spectacular change of course announced in the second half of 2022.
Following a tragic 95% decline in the share price – from a historical peak of $13.05 in February 2021 to a trough of 43.5 cents in June 2022 – Zip pulled the pin on its growth-at-all-costs global strategy and made profitability its new focus.
This change, of course, necessitated a significant downscaling of operations, and a simplified business strategy to achieve positive cash flow and profitability.
The plan involves a three-pronged process: Growth in the Australia/New Zealand and United States businesses, an improvement in unit economics, and a reduction in costs.
Zip has now exited 10 of its 14 markets, including the United Kingdom, India, and Singapore.
This leaves Zip with three core markets: Australia/New Zealand, the United States, and Canada.
It has begun the process of selling off its assets in those abandoned markets to boost its balance sheet.
The company expects to complete this process by the end of next month.
Mark these dates
Looking ahead, there are two critical milestones that Zip hopes to achieve.
The first is turning the US business cash flow positive by the end of FY23 — that's next month.
We'll find out in July or August whether the company has got this done.
The Australia/New Zealand business has been cash flow positive for four years already. Getting the US business cash flow positive will enable the company to achieve its second goal, which is making the group cash flow positive by the first half of FY24.
So, we'll be looking for an announcement on this front in January or February 2024.
Is this the start of a turnaround on the Zip share price?
To get a turnaround in the Zip share price, we probably need a turnaround in the business first.
Our latest peek at the books occurred in April when Zip released its Q3 FY23 results.
As my Fool colleague Bernd reported, Zip increased its quarterly group revenue by 16% in 1H FY23 compared to 1H FY22.
Year-over-year (yoy) quarterly revenue increased by 23% in Australia and 7% in the US.
Zip said it "is on track to deliver group positive cash EBTDA during H1 FY24".
So, that all bodes well for the Zip share price.
But analysts appear sceptical about whether Zip can achieve its goals.
Shorting interest suggests Zip share price will fall
As my Fool colleague James reported on Monday, Zip remains one of the top 10 most shorted stocks of the ASX, with 10.25% of its shares shorted.
Short selling is essentially placing a bet that the share price will fall.
Another reason for the high level of shorting is likely looming new regulations for the BNPL sector.
Although Zip has previously said it is better placed than other BNPL companies to adapt to stricter rules on credit checks, we still don't know which of the three models outlined in an options paper will be taken up by the federal government.
In summary, the three models for BNPL regulation are:
- A tougher industry code, including an affordability test for each customer
- Including BNPL providers under the Credit Act but tailoring their responsible lending obligations
- Applying the Credit Act to the BNPL sector in full.
Choice and 21 other consumer groups are advocating for option three. Zip is pushing for option two.
If Zip gets its preferred regulatory model, and if it achieves its two highly-publicised financial goals for FY23 and 1H FY24, then maybe we will see a turnaround in the Zip share price.
