Will I be buying Zip shares now the company has turned a profit?

Is now the right time to buy this BNPL stock — or not?

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The Zip Co Ltd (ASX: ZIP) share price has done incredibly well for shareholders this year. It just hit a 52-week high, and it has lifted by 63% in 2024 to date.

The company reported impressive revenue growth and even stronger profit growth. Let's quickly remind ourselves of the highlights of the result.

Earnings recap

Zip reported its overall revenue increased by 28.9% to $430 million, while total transaction volume (TTV) improved by 9.6% to $5 billion. How did revenue improve by so much more than TTV? The revenue margin increased 130 basis points (meaning 1.30%) to 8.5%.

The number of merchants rose 9.3% to 76,200, and the number of active customers increased to 6.3% (up 1.6%).

Zip Americas saw revenue rise by 40.3%, and ANZ revenue increased by 22.7%.

The cash gross profit increased by 45.9% to $176.2 million, and Zip achieved group cash earnings before tax, depreciation and amortisation (EBTDA) of $30.8 million. This was driven by a "strong seasonal performance" with US TTV, improved margins and cost discipline.

It reported a cash net transaction margin (NTM) of 3.5%, which was an increase of 90 basis points compared to the FY23 first-half, which the company called a "strong result" in a rising interest rate environment.

Profit growth is key for the Zip share price from here, in my opinion.

The company did report a net profit after tax (NPAT), but that was due to a net gain relating to its senior convertible notes, which was a one-off.

Despite the higher interest rates, group net bad debts were only 1.9% of TTV, which was stable year over year.

In the Australian business, it has adjusted its credit risk settings and tightened the lending criteria, which has delivered improved arrears and net bad debt performance, which is expected to continue in the second half of FY24.

Is this a good time to invest in Zip shares?

It clearly would have been better to buy a few weeks or months ago when the share price was cheaper.

The buy now, pay later company has done a great job of improving its balance sheet over the last 12 months, and it has been impressive how operating profitability has increased during this period.

I'm not expecting its margins to continue to improve, it has already seen a large ramp-up of profitability in the last couple of years. I think competition (or merchants complaining) could stop further significant revenue margin increases from here.

Despite the years of growth and margin improvements, Zip is only just starting to make a profit, so it will need to keep growing scale to make meaningful profit from here.

There's a danger of arrears and bad debts rising if unemployment worsens or if the cost-of-living becomes too much for some customers to afford their instalments.

However, a fall in interest rates could lower Zip's costs, help customers afford their repayments, and encourage more retail spending.  

I think the Zip share price might be higher in 12 months from now if revenue is higher and interest rates are lower, but that's not certain.

It's not something that I see buying for my own portfolio, but the fact the company is now making positive EBTDA is a positive development for its sustainability. I'd call it a speculative long-term idea after its rally.

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.

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