The Zip share price has soared 147% in 3 months, can it keep going?

The Zip Co Ltd (ASX: ZIP) share price has rocketed 147% over the past three months. In that same time period, we’ve seen the S&P/ASX 200 Index (ASX: XJO) go up by 8.3%.

With that level of return, past performance is definitely not a guarantee of future returns over the next three months. I wouldn’t expect returns of 100% in the next year or even the next five years.

The buy now, pay later business is facing a number of headwinds, including significantly higher interest rate costs, a reduced global growth runway following exits from multiple countries, increased regulation and a customer base facing challenging economic conditions.

Those are major problems, and risks, and I think it largely justifies the massive decline for the Zip share price we’ve seen over the past couple of years. It’s down over 90% from its peak in February 2021.

But, it’s not all bad news. There are a few positives that could help send the Zip share price higher.

Ongoing growth

Despite all of the problems that are happening for the ASX buy now, pay later share, the company is still delivering good top-line growth.

The latest we’ve heard from Zip is the quarter for the three months to December 2023, which saw transaction volume growth of 8.5% year over year to $2.8 billion. Transaction numbers for that quarter rose 4.1% year over year.

The company’s revenue margin improved from 7.1% in the second quarter of FY23 to 8.2% in the second quarter of FY24.

This led to group quarterly revenue of $225.6 million, which is an increase of 26.1% year over year.

In the FY24 second quarter, a number of key enterprise merchants launched during the period, including Amaysim, Bang & Olufsen, National Geographic and RM Williams. In the US, it announced a partnership with Google Pay, which went live in January.

Improving profitability

Being profitable didn’t seem to be a key focus for Zip during the 2010s as it looked to grow rapidly.

Zip’s scale has now reached a level where it’s a lot easier to make a profit. These days, the company is focused on making a profit, with the high interest rate environment making this goal even more important.

In the update for the three months to December 2023, the company said its cash transaction margin improved to 3.5%, up from 2.8% in the FY23 second quarter. It also pointed out that US bad debts “continued to perform well,” with the monthly cohort loss rates being approximately 1.3% to 1.4% of the total transaction value (TTV), which was below its target range of between 1.5% to 2%.

I think making profit will be key for the Zip share price from here..

It’s expecting to achieve positive group cash earnings before tax, depreciation and amortisation (EBTDA) in the second half of FY24 and for the whole FY24.

Sorted out the balance sheet

Zip announced in mid-December that it had completed new funding facilities to strengthen its balance sheet, simplify the capital structure and support ongoing profitable growth.

It executed an agreement for a new $150 million corporate debt facility which refinanced its existing corporate debt of $90 million.

Zip has worked hard to reduce the value of convertible notes on its balance sheet.

The business has refinanced its receivables funding in both the US and Australia as well.

Final thoughts on the Zip share price

Zip is doing the right things to grow its business during this difficult period. It could recover more if it reaches profitability in terms of the net profit, and proves it can make money sustainably, but it’s not the type of business I’d want to own in my own portfolio.

The post The Zip share price has soared 147% in 3 months, can it keep going? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison 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 Zip Co. The Motley Fool Australia has no position in any of the stocks mentioned. 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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