If I buy $1,000 of Zip shares now, what could my returns be this year?

It was the best of times, it was the worst of times. The last five years have been a rollercoaster for Zip Co Ltd (ASX: ZIP) shares. 

What is now ASX’s largest buy now, pay later (BNPL) provider began life on the market as resource stock Rubianna. It transformed into the Zip we know today after acquiring the fledgling BNPL business in 2015 – a year after it first launched.

The Zip share price then gained more than 3,500% over the following years, hitting a record high of $14.53 in early 2021. But the years since haven’t been nearly so kind.

Of course, past performance is not an indication of future performance. Still, I’d argue it’s important to look to the past to determine how a company came to be where it is, and how it might move forward.

Recapping the Zip share price

The Zip share price has fallen more than 90% over the last two years to trade at 66 cents today. Looking further back, it’s fallen 48% over the last five years – an average of nearly 10% each year.

Of course, there’s more to the company’s story than those numbers. It rose to its highest heights during the 2021 tech rally alongside former market darling Afterpay.

While there’s heaps of competition in the BNPL space today – Apple Inc (NASDAQ: AAPL), PayPal Holdings Inc (NASDAQ: PYPL), and even some of Australia’s big four banks boast BNPL offerings – back in 2020 and 2021 consumers wishing to pay for purchases in instalments only had a handful of choices, Zip being one. And its revenue was growing. However, it didn’t grow fast enough.

The market turned on unprofitable companies in 2022 as surging inflation dinted consumers’ back pockets and led to rate hikes around the globe.

In turn, the cost of borrowing soared and concerns Zip could face more bad debts amassed.

Looking to the future

So, that’s what brought Zip shares to where they find themselves today. Could worst be behind them?

The obvious happening that could turn things around for the stock would be a maiden profit.

Passing the financial milestone could boost both sentiment and confidence in the stock, thereby bolstering its price.

Zip posted record revenue and transaction volume for the December quarter. Its United States segment also became profitable during the period.

Not to mention, the company expects to be cash earnings before tax, depreciation, and amortisation (EBTDA) positive on a sustainable basis at the end of this financial year.

It also boasted $78.5 million of cash and liquidity – enough to see it through to the milestone, according to the company. That suggests it mightn’t need to raise cash in the near future.

Could Zip shares provide returns in 2023?

With that in mind, it’s definitely possible the Zip share price could pull itself up by the bootstraps and charge forward in 2023. Indeed, it could be on track to post a notable recovery before the year is out.

However, I’m still sceptical of the BNPL giant’s future. Unprofitable outfits generally house a considerable level of uncertainty. Additionally, many of the factors weighing on Zip in 2022 haven’t abated yet.

For that reason, I’m passing on Zip shares for now. Instead, I’ll keep a hold of my cash until I come across an investment I have more confidence in.

The post If I buy $1,000 of Zip shares now, what could my returns be this year? appeared first on The Motley Fool Australia.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, PayPal, and Zip Co. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and PayPal. 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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