Zip Co Ltd (ASX: ZIP) has always been clear on its trajectory — grow first, make profit later. And for a while, investors were on board with the buy now, pay later (BNPL) company's pathway to profitability. Its cash burn was readily accepted as a means to fuel growth, and investors looked to user adoption and transaction volume as the primary measures of success.
However, with changing economic conditions, investors began asking more questions about execution and profitability.
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What's happening at Zip Co?
While Zip Co shares saw circa 60% growth over the last twelve months, year to date, they have dropped roughly 40%.
Zip has been responding to changing investor sentiment for some time, reducing costs, improving margins, and narrowing losses. In February, it reported some impressive 1H26 results, including:
- A significant improvement in operating margin at 18.7%, up from 13% on the prior corresponding period (PCP)
- Record total transaction volume of $8.4 billion, a 34.1% increase on PCP
- A 4.1% increase in active customers on PCP
- 10.5% growth in merchants on the platform
But it is still asking investors to believe that the worst is behind it and the best is still worth waiting for. There is no denying that Zip is a company on the improve. The question is whether investors will be willing to back its next phase.
What is happening in the BNPL sector more broadly?
Looking at what is happening in the BNPL sector more broadly, it was flying in 2022. In Australia, according to Finder, 49% of Australians were actively using the service to fund purchases. And this looked set to grow. But things went the other way, dropping to 40% or 2 in 5 Australians by 2024. That said, more recent surveys have found high adoption rates amongst younger consumers and Australians remain one of the highest users of BNPL. In addition, with Gen Z eschewing the traditional credit card model, there is still room for user growth.
Of course, BNPL is irrevocably tied to consumer spending. And it is more widely used by younger consumers, who are also more likely to be affected by current conditions. On the flip side, given that it can fund a wide range of products and services, it may prove an interest-free lifeline on hard-to-delay purchases for some right now.
Whether you believe BNPL can pick up or not in the current climate is key to your investment decision as reaching profitability for Zip Co is highly sensitive to the broader economic backdrop.
Are Zip Co shares a buy right now?
Many analysts certainly think so. And with the share price rallying 20% yesterday, it looks like investors are starting to agree.
Zip Co is a materially better business today than it was in 2022. Costs and losses are both trending in the right direction and its geographic footprint is more focused. User growth and transaction volume continue to grow, despite challenging market conditions.
But right now, Zip is sitting in an uncomfortable middle ground. It is no longer a high-growth disruptor that investors are willing to fund on belief alone, but it has not yet reached profitability. In calmer economic conditions, it could well have remained in investor favour.
For me, Zip Co shares are a conditional buy. There is certainly potential upside at the current price. And it is making the right moves towards profitability. But you have to be comfortable with some volatility in the near-term and wholeheartedly believe in a cyclical recovery in consumer spending.
