Can ‘Operation Blue Sky’ take Zip shares up the path to profitability?

a woman looks down at her phone with a look of concern on her face and her hand held to her chin while she seriously digests the news she is receiving.a woman looks down at her phone with a look of concern on her face and her hand held to her chin while she seriously digests the news she is receiving.

Zip Co Ltd (ASX: ZIP) shares have experienced a tempered start to the week.

At the time of writing, the Zip share price is in the green. In turn, the buy now, pay later (BNPL) business is now down 6% since Monday. However, we should view this move in the context of the company’s sensational 33% rise in the prior week.

In a swift change of sentiment, investors are now brimming with enthusiasm amid Zip’s new focus.

Sky-high ambitions for the future

Growth investors don’t need to be reminded of the demolition that has played out to loss-making companies this year. The double whammy of rising inflation and amped-up interest rates has put pressure on companies to deliver profitability.

As previously reported, Zip shared its quarterly update with investors on 21 July. While the market has responded positively to the Zip share price since then, the elephant in the room remains the lack of profits.

For the year ending December 2021, the BNPL company reported a significant bottom-line loss of $419.3 million. With $278.6 million in liquid cash available for use at the end of 30 June, it is apparent that Zip would need to take action to remain solvent without the need to raise further capital (which is a challenging task in the current environment).

As a result, Zip is undertaking what has been internally dubbed ‘Operation Blue Sky’. The main objective of this strategic plan is to strip away costs and make the business economically viable without the need for outside capital intervention.

Goals mapped out in Operation Blue Sky include the removal of $30 million in employee costs, stepping back global expansion, conducting more stringent lending scrutiny, and holding off on new product launches.

Zip shares have responded with a resounding optimism in light of the objectives. However, the plans haven’t won over UBS analyst Tom Beadle who retains a sell rating on the BNPL company.

Zip shares under the microscope

The Zip share price has suffered at the hands of deteriorating sentiment toward the BNPL sector. Since the beginning of the year, Zip shares have witnessed 75% of their value evaporate. For comparison, Block Inc (ASX: SQ2) (owner of Afterpay) has sunk 53%.

However, Zip now trades on a price-to-book (P/B) ratio of around 0.5 times. This represents a much steeper discount compared to Block’s 2.6 times.

The post Can ‘Operation Blue Sky’ take Zip shares up the path to profitability? appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has positions in Block, Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Inc. and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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