The Zip Co Ltd (ASX: ZIP) share price is edging lower today.
Shares in the S&P/ASX 200 Index (ASX: XJO) buy now, pay later (BNPL) stock closed yesterday trading for $2.24. In morning trade on Friday, shares are changing hands for $2.22 apiece, down 0.9% (at the time of writing).
For some context, the ASX 200 is just about flat at this same time.
But brave investors who snapped up the ASX BNPL stock at the on-year lows of $1.19 on 7 April are unlikely to be complaining about today's modest underperformance. The Zip share price is up a remarkable 86.6% since then.
That's enough to turn an $8,000 investment into $14,924, in just two months.
And according to Michael Carmody, a portfolio manager at Centennial Asset Management, the ASX 200 payments company is well-placed to continue outperforming in the year ahead (courtesy of The Australian Financial Review).
Tailwinds building for the Zip share price
"We have a bullish outlook for the market, particularly for small caps," Carmody said.
Part of that bullishness stems from his expectations that the two interest rate cuts we've seen from the Reserve Bank of Australia this year, bringing the official cash rate to the current 3.85%, are set to be followed with further easing.
"We expect the RBA to cut rates several more times in the next year," Carmody said. "This is likely to inject fresh momentum into household spending and to boost the value of consumer-facing stocks exposed to domestic demand."
Which brings us back to his bullish outlook for the Zip share price, with BNPL stocks tending to perform better in low and falling interest rate environments.
Asked which stock his fund owns that he believes has the most near-term upside, Carmody said, "In the short term, we believe Zip has the potential to rally."
Carmody explained:
Zip is well positioned to deliver further strong growth in revenues and profitability. The US buy now, pay later market remains relatively immature and Zip's US footprint is likely to grow rapidly as it matures.
In addition, new product launches are expected to contribute to the company's transaction volumes and earnings growth during the next year.
Other growth catalysts
As for other tailwinds that can lift the Zip share price, he added, "Zip's balance sheet strength and ongoing buyback are also expected to support the share price performance."
Zip announced its $50 million on-market share buyback on 8 April. When companies buys back shares, it reduces the supply of those shares, which helps support the share price. As of early May, Zip said it had repurchased $6.4 million worth of shares as part of that program.
Another reason Carmody is optimistic that the Zip share price can keep charging higher is its strong earnings growth. At its third quarter update, the company reported cash earnings before tax, depreciation and amortisation (EBTDA) of $46 million, up 219%.
"Zip has surprised the market with better-than-expected earnings over the last year," Carmody said.
He concluded, "Post the most recent quarter, the company upgraded expectations again. We see additional upside earnings risk in the future."
