After three consecutive trading days of strong gains, Zip Co Ltd (ASX: ZIP) shares are in the red today.
Shares in the S&P/ASX 200 Index (ASX: XJO) buy now, pay later (BNPL) stock closed yesterday trading for $2.41. In afternoon trade on Tuesday, shares are changing hands for $2.38 apiece, down 1.2%.
But, as you can see in the chart below, today's dip does little to dent the phenomenal returns the ASX BNPL stock has delivered to stockholders over the past year.
Twelve months ago, on 18 September 2023, Zip shares were trading at what we now know to be the bargain basement price of 30 cents each. Although the real bargain came two days later, when Zip stock closed the day trading for just 27.5 cents a share.
That sees shares up an eye-popping 693% over 12 months. Or up 765% for those investors who timed it perfectly and bought shares on 20 September.
But that's all water under the bridge.
The question facing ASX 200 investors now is whether the momentous rally in Zip shares is running out of steam or just getting started.
Can Zip shares keep on giving?
Launching right into it here, I believe Zip certainly has the potential to outpace the ASX 200 in the year ahead.
However, while the company could deliver another 693% gain over time, I don't think investors should expect a repeat of that stellar performance over the next 12 months.
As for why I think the rally in Zip shares isn't over yet, we are fast approaching an environment of falling interest rates. And BNPL stocks like Zip have proven to be very sensitive to interest rates.
The US Federal Reserve is very likely to announce a rate cut on Wednesday (overnight Aussie time). While the RBA may hold rates steady into 2025, Australia's central bank will also mostly likely begin easing at some point over the coming half year.
On a company-specific level, Zip's transition from targeting growth at all costs to its new, more sustainable, and profitable business model continues to pay off, with the company reporting four consecutive profitable quarters.
For its full-year financial results (FY 2024), Zip achieved a 28.2% year on year increase in revenue to $868 million. Total transaction volume (TTV) of $10.1 billion was up 14.0% from FY 2023, and Zip's cash gross profit of $373 million was up 52.8% from FY 2023.
As at 30 June, the company had available cash of $80.4 million.
Zip shares closed down 7.9% on the day of those results before rocketing 13.9% higher the following day.
CEO Cynthia Scott appeared to have a good handle on the business and sounded an optimistic note on the company's outlook.
"We maintain a clear strategy with identified growth opportunities in both markets to drive continued profitable growth in FY 2025 and beyond and deliver long-term value for our customers, merchants and stakeholders," she said.
