There are few ASX stocks out there that have achieved a recovery like buy now, pay later company Zip Co Ltd (ASX: ZIP). In 2024 to date, the Zip share price is up an incredible 384%.
Despite the amazing rise, it's still down more than 30% from December 2021, as shown on the chart below.
The rise is somewhat surprising, considering the current high interest rates probably aren't helpful for Zip's customers because they increase the cost of debt, and their purpose is to hurt overall economic demand.
I believe it's because Zip has managed to improve its profitability performance without stopping revenue growth.
Let's remind ourselves of the latest financial update from the company.
FY24 result recap
For the 12 months to 30 June 2024, revenue jumped by 28.2% to $868 million, with a 14% increase in total transaction volume to $10.1 billion. The revenue margin increased by 96 basis points to 8.7%.
The various profit-related metrics showed improvement. Cash gross profit rose 53.8% to $372.9 million, cash net transaction margin (NTM) improved 96 basis points to 3.8%, cash operating profit (EBTDA) soared 243.2% to $69 million, and net bad debts declined 18 basis points to 1.7%.
While merchant numbers increased 9.6% to 79,300, the active customer numbers dropped 2.9% to 6 million.
Can the Zip share price keep climbing?
From now on, I think the most important thing is that Zip delivers profitable growth. The FY24 EBTDA growth of 243% to $69 million was pleasing.
Looking at the regional performance, it was good to see that Zip Americas achieved cash EBTDA growth of 420% to $77.2 million, compared to Zip ANZ's cash EBTDA growth of 137.4% to $33 million. Zip Americas has a large target market, with the US population being over 330 million compared to around 31 million for Australia and New Zealand.
If the Zip share price keeps growing its profit, it'll have a great chance of delivering capital growth.
However, with an ASX growth share like Zip, it is certainly possible for the valuation to get ahead of itself.
Is the valuation attractive? Let's look at where analysts are thinking about the buy now, pay later ASX share.
A price target is where analysts think the share price will be in 12 months from now. Factset data shows the median analyst Zip price target is $2.45, and the average price target is $2.32, which suggests a possible decline of at least 18%.
But, the highest price target is $3.03, which would represent a slight rise from the current Zip share price. However, the worst prediction is a price target of $1.50, which suggests the buy now, pay later stock could halve in value.
Analysts generally seem to think the Zip share price isn't going to rise in the next year. But, if profit keeps rising at a good pace, then the stock could keep climbing over the longer term, in my opinion.
