Is it time to put Zip shares back on the table in 2024?

The share price says Zip has its mojo back, but has my mind changed on buying shares?

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Zip Co Ltd (ASX: ZIP) shares are the best-performing companies in the All Ordinaries Index (ASX: XAO) in 2024 so far. Personally, I have never taken much of an interest in buying Zip shares, but the recent run has left me with egg on my face.

In less than four months, the Zip share price has flown from 64 cents to $1.41, a year-to-date increase of 127%. This is an incredible return compared to the benchmark's paltry 3.1%. Overcoming the odds — namely high interest rates — Zip grew on all key fronts in its half-year results.

So, is it time I ate my words and invested in this enduring buy now, pay later (BNPL) business?

Interest rate relief for Zip shares

There's no denying that Zip is moving in the right direction.

Operating costs at the Afterpay competitor have been falling for the past two years, losses are narrowing, and revenue is growing. That's a great position for a company.

For the first time, potentially in its history, real profitability looks possible. At long last, there's a chance Zip can prove its viability with genuine net profits after tax (NPAT). If it can do that, we can begin looking at it with less speculation and more fundamental analysis.

The optimist in me thinks falling interest rates could be the spark that sets profitability into motion.

Rate cuts before the end of the year are the general consensus among economists. Some are forecasting by August, and others are forecasting for December. Either way, the economic environment could soon be more conducive to BNPL spending.

Additionally, lower rates will help lighten Zip's $2.5 billion debt burden.

Where's the value?

Now for the more pessimistic side of my personality.

Regulation proposed by the Australian government could risk BNPL's edge. The current proposals might mean Zip, Afterpay, and others must conduct credit checks and hold an Australian credit license.

Fortunately for Zip, it already conducts checks and holds a license. Still, I wonder how these companies differ from other credit providers. More importantly, how will they outcompete other options once on a level playing field?

The technology is hardly nascent. Payment giants such as PayPal Holdings Ltd (NASDAQ: PYPL), Apple Inc — heck, even our very own Commonwealth Bank of Australia (ASX: CBA) offers 'pay later' options.

My concern is that Zip and others might become just lower-margin lending businesses. In which case, it's hard for me to see how Zip shares outperform traditional lenders long term.

Motley Fool contributor Mitchell Lawler has positions in Commonwealth Bank Of Australia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended PayPal and Zip Co. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool Australia has recommended PayPal. 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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