Has ‘growth at all costs’ been the undoing of Zip shares and what now?

The Zip Co Ltd (ASX: ZIP) share price opened at 66 cents this morning, down 1.34%. The S&P/ASX All Ordinaries Index (ASX: XAO) is up slightly by 0.33% in early trading.

Joseph Koh, a senior analyst at Schroders, writes on Livewire that Zip has been a “cash burner” that has “pursued growth at just about any cost”.

He reckons the buy now, pay later (BNPL) company has been too caught up in chasing its large total addressable market (TAM). In the meantime, the Zip share price has absolutely tanked.

What’s next for the Zip share price?

Koh says “the cohort of cash-burning stocks in the ASX has significantly underperformed the broader market year-to-date”.

And how. The Zip share price is down 85% while ASX All Ords shares are down 12%.

Koh also said that “gains made in the false dawn of July have been relinquished”.

The Zip share price rose by 159% over the month of July. It reached $1.14 at the close on Friday 29 July. It’s dropped 42% since then, so not all gains have been relinquished in the case of Zip shares.

The stock is still trading 50% above its 52-week low of 44 cents.

Zip vs CSL vs REA

Koh compares Zip’s performance since it was founded in 2013 to that of ASX darlings CSL Limited (ASX: CSL) and REA Group Limited (ASX: REA) in their early days.

He said CSL and REA “did not have to incur many years of large losses and equity injections in their early days to achieve their strong growth and high returns (and dominant market positions)”.

Koh explains:

Based on Bloomberg figures, CSL, a year after listing in June 1994, made a net profit of US$18m in FY95, with US$7.4m of free cash flow.

REA incurred just over $18m of losses in the 3 years after its listing in 1999, with cumulative free cash flow of negative $8m – cash flows that were more than recouped in the subsequent 3 years.

Zip was founded in 2013 and has regularly incurred losses which have grown to more than $1.7bn in the last two years (FY21 and FY22), with negative free cash flows of more than $700m. 

Is Zip changing course from ‘growth at all cost’?

In short, yes.

As we’ve previously reported, Zip has announced various changes in its business. This includes abandoning some markets and targeting positive cash flow and profitability instead.

Zip is closing its Singapore and United Kingdom businesses, which form part of its non-core ‘rest-of-world’ market. In July, Zip and Sezzle Inc (ASX: SZL) mutually agreed to abandon plans to merge.

The company is now focused on its two core markets — Australia and New Zealand, and the United States.

Zip management sees the US as ‘a significant opportunity’. So much so that Zip CEO Larry Diamond has relocated to the US with his family, as reported last week.

Zip mapped out its strategy to become cash flow positive in its annual report in late September.

Zip will report its Q1 FY23 results tomorrow. A positive report will likely boost the Zip share price.

The post Has ‘growth at all costs’ been the undoing of Zip shares and what now? appeared first on The Motley Fool Australia.

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More reading

• If I’d bought $1,000 of Zip shares at their all-time high, here’s how much I’d have left
• After a horror year, what’s next for ASX BNPL shares in the new quarter?
• ‘Significant opportunity’ Zip share price turns red as CEO packs his bags for the United States
• Macquarie says Zip share price has further to fall
• Zip share price sinks 5% to 3-month lows

Motley Fool contributor Bronwyn Allen has positions in CSL Ltd., REA Group Limited, and ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL Ltd. and ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Schroders (Non-Voting). The Motley Fool Australia has recommended REA Group Limited. 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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