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Zip Co on track to reach break-even in 2024 and weather rising rates
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Zip highlights a pipeline of enterprise merchants and says there’s significant opportunity despite the heightened inflationary environment.
Leading buy now, pay later platform (BNPL) Zip Co (ASX:Z1P) has provided an update to the market reaffirming the company’s focus on reaching break even by 2024.
Zip said the underlying business remained strong with consistent customer growth and transaction volume across its core markets and highlighted a solid pipeline of enterprise merchants including Qantas, eBay and Best Buy.
The company also moved to reassure the market that it is well placed to respond to, and offset, the effects of rising interest rates through a series of new initiatives which are in train.
Despite the heightened inflationary environment, CEO Larry Diamond said the company saw significant opportunity for the company as well as the broader BNPL sector.
“We believe our business model will stand up exceptionally well in such an environment as we continue to provide significant value and benefit to our customers and, importantly, our merchant partners seeking to drive continued growth,” he said.
Ords upbeat
Initial analyst reaction has been positive. Ord Minnett, which has an Accumulate Rating and a Price Target of $2, pointed to Zip’s solid pipeline and commitment to reaching cash flow breakeven in FY24 noting “on the back of the recent capital raising we expect this to be the case.”
Phillip Chippindale said Ords “expected the focus on capital and costs to have been getting even stronger over the last few months, given the changing macro and valuation environment.” In that sense, he said, the update matched up with expectations.
Pathway to profitability
Zip also spoke to its commitment of reaching profitability saying it had undertaken a series of proactive steps to accelerate the pathway, including simplifying and prioritising initiatives in the already profitable Australian operation.
It also reiterated its commitment to “right-size” the company’s global cost base and said it had completed a process to reduce global people costs which would deliver more than $30 million in EBITDA benefits in FY23.
The company also reaffirmed its move to drive losses towards its target level of 2% of total transaction value.
US strategy
Zip said the US remains a core market for the company and highlighted its resilience to a rising rate environment relative to credit cards and other consumer credit businesses with “any 25 basis point rise in base rate only impacting cost of funds by around two basis points per transaction”.
Zip announced plans earlier in the year to buy US-based rival Sezzle as part of a plan to strengthen its position in the critical market.
The company said the merger would create $130 million in EBITDA benefits by 2024.
Well-funded for break even
Zip said the company remained well funded with sufficient capital to see it through to cash flow break even in FY24.
As of the 31st of March 2022, it had $303 million available in cash and liquidity as well as an additional $24 million raised from the SPP in April.
The company said it would provide the market with a more detailed update on its progress at the upcoming 4Q22 result on 21 July 2022.
This article was developed in collaboration with Zip Co, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
