Zip Co Ltd (ASX: ZIP) shares wrapped up FY24 on a high. Over the 12 months to June 28 2024, shares in the buy now, pay later (BNPL) stock soared 256% into the green.
The benchmark S&P/ASX 200 index (ASX: XJO) didn't even come close to that result.
Investors are eager to know what the future holds for the BNPL player. Especially as gains have continued into the new financial year.
Let's dive into the factors driving the recent performance and explore the expert outlook for FY25.
Why are Zip shares soaring?
Zip share price performance was impressive through the COVID-19 pandemic years. Investors sent the stock on a meteoric rise to an all-time high of $12.35 per share in February 2021.
They plunged not long after, wiping billions in market capitalisation from the company's value. The selling continued until October last year when investors returned to buy Zip shares at lows of 25.5 cents per share.
Fast forward to today, and Zip shares have rebounded to their current price of $1.65.
Zip's business performance under new management has been a major driver of its stock price recently. The company shifted from an aggressive growth strategy to a more sustainable, profitable model, garnering positive sentiment from investors.
Tyndall Asset Management's James Nguyen highlighted this transformation as a key differentiator from its BNPL peers. Speaking to The Australian Financial Review, Nguyen said:
[Zip] was previously a market darling, capitalised at over $6 billion despite reporting losses of more than $200 million per annum. Higher interest rates, loose credit leading to high bad debts, and a weaker consumer resulted in significant shareholder value losses.
While the macro environment is now more supportive, it is the company-specific turnaround under new management that sets Zip apart from its BNPL counterparts. Growth for growth's sake has been abandoned, as has its international domination aspirations, and in place is a sustainable, profitable growth strategy.
Nguyen says Zip's focus on profitability over growth for growth's sake is paying off. Within 18 months, the company expects to earn nearly $100 million in earnings before interest, tax, depreciation, and amortisation (EBITDA).
Additionally, Apple Inc.'s (NASDAQ: AAPL) decision to cancel its BNPL service in the United States, Apple Pay Later, appears to have increased investor confidence. This reduction in competition could help Zip increase its market share in the lucrative American market.
What's next for Zip shares in FY25?
UBS and Ord Minnett both maintain buy ratings for Zip shares, setting price targets of $1.55 apiece, respectively.
According to CommSec, the stock is rated a buy from consensus. Out of the seven firms covering Zip, five rate it a buy directly, four say it's a hold, and one firm rates it a sell.
Looking ahead, Zip's ability to maintain its profitability focus while growing market share will be crucial, in my view.
One key area to monitor is Zip's performance in the US market, where it has shown significant growth. Apple's decision to withdraw from the BNPL race could be a tailwind.
Setting context for this, in its most recent quarterly results, Zip reported a 14.6% year-on-year increase in transaction volume to $2.4 billion despite a 3% rise in active customers to 6 million.
But US revenues were up more than 49% to US$74.3 million, underscored by a 43% growth in transaction volume there.
Foolish takeaway
Zip shares have delivered stellar gains in FY24, locking in triple-digit gains for the year.
As the company continues its transformation under new management, the outlook for FY25 remains promising but requires careful monitoring. As always, remember to conduct your own due diligence.
