• Zip’s stock jumped 830pc in 12 months after a strategic shift
  • New CEO Cynthia Scott boosted cash EBITDA by 243pc
  • Is BNPL sector set for a rebound?

 

In 2021, Zip Co (ASX:ZIP) was seen as a trailblazer in the booming buy-now-pay-later (BNPL) market.

But as more players jumped into the field – including some big names like PayPal and Affirm – competition heated up. Suddenly, the market became a crowded battleground, and Zip found itself facing pressure on both its market share and profitability.

As 2021 rolled on, things took a turn that left investors reeling as a broader shift in market sentiment began to take hold.

With inflation on the rise and interest rates climbing, investors started pulling back from growth stocks, particularly in the tech and fintech sectors. This shift forced many to reconsider their portfolios, and unfortunately, Zip’s stock didn’t escape the fallout.

Adding to the mix was the increasing regulatory scrutiny facing the BNPL industry.

There were whispers of potential regulations aimed at protecting consumers, which stirred concerns about how these changes might impact Zip’s business model. Investors became wary, wondering if the good times could continue under tighter oversight.

Amidst this whirlwind, Zip’s financial performance also started raising eyebrows.

The company reported mixed results, showing slower growth rates and higher losses than many had anticipated. This led to worries about its long-term viability and ability to turn a profit in such a competitive landscape.

Compounding these issues were broader economic uncertainties. Supply chain challenges and shifts in consumer spending habits post-pandemic created an unpredictable environment, making it tough for companies like Zip to maintain momentum.

In a matter of months, Zip’s stock price plunged as the company went from a darling of the fintech world to a cautionary tale for investors.

 

The comeback story

Zip’s comeback story has been nothing short of remarkable.

The company has staged an impressive turnaround, with its shares soaring a staggering 830% over the past 12 months.

So, what did Zip do to make this happen?

First and foremost, Zip made a strategic pivot. The company focused on streamlining its operations and enhancing its core offerings. By sharpening its focus on the customer experience, Zip rolled out features that made using its platform not just convenient, but also more appealing to a wider audience.

The company also improved its app, making it easier for users to navigate and manage their payments, which helped reignite consumer interest and engagement.

But it wasn’t just about the user interface; Zip also worked hard to secure partnerships with major retailers and brands. These collaborations not only broadened its reach but also positioned it as a go-to choice for consumers.

 

New CEO drives results

Zip’s turnaround gained real momentum after the appointment of Cynthia Scott as CEO in August 2023, replacing founder Larry Diamond who transitioned to the role of executive chairman.

Before joining Zip, Scott held senior leadership roles at various fintech companies, where she was instrumental in strategic transformations.

In the year FY24 ending 30 June, Zip posted cash EBITDA of $69 million, up a staggering 243% from the previous year, while revenue climbed to $868 million, a 28% increase on the pcp.

Total transaction volume reached $10.1 billion, up 14%. Crucially, Zip’s bad debt rate improved, dropping to 1.7% of transaction volume, indicating better credit risk management.

In the Americas, the company achieved record cash EBITDA of $77.2 million, driven by strong performance in higher-margin channels, including partnerships in the automotive sector and sponsorships with popular sports events.

Meanwhile, Zip’s operations in Australia and New Zealand also did really well, with revenue growth of 13.5% and significant improvements in revenue margins, even in a challenging macroeconomic climate.

Product innovation played a key role in Zip’s strategy, with the launch of new offerings such as Zip Plus in Australia and the ‘Pay-in-8’ option in the US.

Also, Zip took significant steps to strengthen its balance sheet by extinguishing convertible notes and repaying corporate debt through successful equity placements. This not only simplified its financial structure but also provided ample liquidity for future growth.

“This has been an outstanding year for Zip, with the company executing against all of its strategic priorities and reinforcing its position as a strong, simplified and profitable business,” Scott said.

 

So is BNPL coming back?

The BNPL industry in Australia indeed seems poised for a comeback, but it won’t be without its bumps along the way, especially with regulators keeping a close eye on the sector.

The Senate Economic Legislation Committee has recently approved measures that would empower the Reserve Bank of Australia (RBA) to regulate a broader range of payment systems, including BNPL services, as well as payment platforms like Apple and Google Pay.

This new regulatory focus could lead to significant changes for BNPL providers.

For instance, regulators are considering removing the no-surcharge rules that currently benefit these services, which could impact profit margins and potentially affect consumer demand.

Although BNPL companies may not have to perform the same rigorous credit checks as traditional credit card providers, the proposed regulations could still pose challenges to their business models.

However, not all is doom and gloom.

Unlike some of its competitors, Zip, for instance, has managed to navigate this turbulent landscape without experiencing the same downfall as companies such as Openpay or Payright (both now delisted from the ASX).

Meanwhile, Ovanti (ASX:OVT) is another contender in the market with promising prospects ahead.

The company’s shares surged 225% the other week after announcing the appointment of former Zip’s US CFO, Simon Keast, as its new CEO. Keast has a clear mandate to launch the company’s BNPL offering in the US market.

“We are excited to re-launch our BNPL offering with entry into the US market with such deep potential to win market share in various segments of the US market presently under-serviced by the large incumbents,” said Ovanti chairman, David Halliday.

Another ASX player that could see a boost is non-bank lender, MONEYME (ASX:MME). Overseas, financial results from major players such as Block, which owns Afterpay, also indicate that the sector is bouncing back.

So in summary, despite the regulatory challenges, the outlook for the surviving BNPL players is more positive than it was a year ago.

“With so many Australians making BNPL their payment method of choice, the broader economic benefits simply cannot be understated,” said Australian Finance Industry Association (AFIA) CEO, Diane Tate.

“More than 5.2 million Australians are choosing to use BNPL because it is low risk, low cost and easy-to-use digital technology,” Tate added.