Will Zip Co shares ride high on fast-tracking of profitability?

Beleaguered buy-now-pay-later (BNPL) company Zip Company Limited has seen its share price surge on hopes of achieving profitability sooner than expected via solid revenue growth and a renewed focus on its core business. The company is scaling back ambitions to expand overseas and has committed to the fast-tracking of profitability following a strong performance in the June quarter.

Merger with Sezzle scrapped

On 12 July, Zip announced the scrapping of its proposed merger with ASX-listed BNPL platform Sezzle Inc., in a move that will significantly scale down plans to expand into the North American market.

The merger deal was first announced in late February 2022, and received the unanimous backing of the boards of both companies. If successful, the merger would have seen Zip shareholders acquire 78% ownership of a combined entity that would have had 8.8 million customers and 60,500 merchants in the US.

At the time of the announcement of the merger’s termination, Zip board member Diane Smith-Gander said in an official statement that the decision would enable Zip to focus more on its primary operations and strategy. ‘We believe that mutually terminating the merger agreement with Sezzle at this time is in the best interests of Zip and its shareholders, and will allow Zip to focus on its strategy and core business in the current environment,’ Smith-Gander said.

According to its June quarter report, Zip is also in the process of closing its Singapore business as part of efforts to reduce the group’s cash burn and focus on its core markets of Australia, New Zealand and the US.

Zip anticipates swift shift to profitability

Zip chief executive Larry Diamond said the streamlining of the company’s ambitions and its renewed focus on core operations could enable it to achieve profitability ‘earlier than anticipated.’ Robust revenue growth is another key to the company’s hopes for a rapid shift towards profitability.

According to its latest results, Zip’s revenue for the June quarter rose 27% year-on-year to $160.1 million, while revenues for its core Australian and New Zealand business leapt 30% compared to the same period last year.

‘We are pleased to announce another solid set of results across our key operating metrics in Q4, demonstrating the continued strength of the Zip business,’ Diamond said in the June quarter report.

‘All this was done whilst balancing and implementing our updated financial strategy to fast-track profitability, by reducing our global cost base, and refocusing our capital and efforts on core products and core markets.’

The company’s flagship products include the Zip Pay and Zip Money digital wallets that can be used with any of its online and offline retail partners. Both these products enable customers to make purchases immediately before paying them off later.

The whittling down of Zip’s operations has seen the closure of its Pocketbook personal finance app at the start of July this year. Zip first acquired the Sydney-based app in 2016 in a $7.5 million deal, with users rising to over 800,000 by 2020 according to its website.

Shares surge on profitability hopes

Zip saw share prices leap 16.5% to 78c on Thursday 21 July, when it released its quarterly update containing a commitment to the fast-tracking of profitability. These gains continued into the following week, with Zip surging over 20% on Wednesday 27 July to $1.24, as well as becoming the most traded stock on the ASX 200.

The company’s shares are still down over 70% year-to-date, however, as well as down nearly 90% compared to its peak value of $12.35. This leaves Zip with a long way to go if it was to return to the heights it scaled in early 2021.

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