It has been an incredible time to own Zip Co Ltd (ASX: ZIP) shares. The buy now, pay later business has surged an astonishing 800% over the last 12 months, as shown in the chart below.
The company has focused on improving profitability and ensuring its sustainability. And investors now are much more optimistic about its ability to make long-term profits.
In its FY24 report, Zip reported 243% growth of its cash operating profit (EBTDA) and a 96 basis point rise of its cash net transaction margin (NTM) to 3.8%.
With these profit measures showing improvement, the market appears to believe Zip's turnaround can continue.
But how much net profit could Zip actually make in the coming years? Broker UBS has provided some estimates.
First, the FY25 prediction
After seeing the company's FY24 result, UBS said it remained "positive on the growth outlook for Zip over the medium term." There was scope for further cash EBTDA upgrades over the next two years, assuming strong growth continued in the United States and a possible recovery in Australia in the subsequent year of FY26.
UBS expects total transaction volume (TTV) of 32% in the US in FY25, thanks to partnerships, additional merchant wins, and the launch of pay-in-8 (over 14 weeks). These could support higher spending limits and 'verticals'.
Australian TTV growth is expected to be flat, but that could be beaten with better-than-expected customer wins and greater adoption of ZipPlus.
The broker also pointed out Zip management was considering a longer-term entry into areas like home loans, insurance, white-labelling and more. This would be in a "capital light measure, which could drive further upside to Australian income growth, without eroding unit economics in the business."
UBS now expects the cash NTM to reach 4% by FY26, compared to its previous forecast of 3.8%. The broker also expects better operating efficiency from Zip. Rising profit margins could help the Zip share price climb further.
For FY25, UBS forecasts Zip's revenue at $1.06 billion and net profit at $31 million.
Then, FY26
As mentioned above, UBS is forecasting that Zip's profit margin can increase between now and FY26. This NTM improvement could help the bottom line soar in FY26 and boost profitability in future years.
The broker projects that Zip share owners could see revenue growth of 17.6% to $1.24 billion in FY26, which could help net profit jump 280%, or $87 million, to $118 million.
How about FY27 and FY28?
Pleasingly, Zip's top and bottom lines are expected to keep rising in the following years.
UBS forecasts that Zip's revenue could increase by 15% to $1.4 billion and its net profit could rise by 38% to $163 million in the 2027 financial year.
The 2028 financial year is projected to be yet another year of growth.
However, the broker expects Zip's momentum to slow in percentage terms in FY28, with revenue growth of 13.5% and net profit growth of 16% to $189 million.
Excitingly, according to UBS, this could be the first year that the ASX buy now, pay later stock pays a dividend.
Finally, what to expect in FY29
The last year of this series of forecasts is projected to be the most profitable of all.
In the 2029 financial year, Zip share owners are forecast to see revenue rise by 11.8% to $1.8 billion and net profit rise by 9.5%.
If these projections bear fruit, it implies the Zip share price is trading at 17x FY29's estimated earnings. Time will tell if today's valuation is a good time to buy or not.
