The BNPL space has enjoyed somewhat of a renaissance, carrying Zip’s shares to 18-month highs, up 4-fold from lows hit in October last year, only six months ago. The rally has certainly been supported by a shift in interest rate expectations, with cuts now seen by the end of this year. However, there has also been a shift in the underlying business in that time as well. As conditions tightened, investors shied away from loss-making tech companies, Zip also faced concerns of higher defaults.
The reality, though, as the company’s first-half result showed, was that the economic environment wasn’t as bad as expected, and Zip was taking advantage. Operating expenditure fell 4% in the first half, while financing costs, bank fees, marketing and employee costs came in better than expected. Loss provisions were also a strong beat; Zip reported a strong $120m in EBITDA on the back of it.
The second half is seasonally weaker, mainly due to the retail trading conditions in the first half (Black Friday & Christmas trade). However, a beat on costs and momentum in the US & new products has set the company up well. There is more work to do, particularly on funding costs; however, for the first time in a few years, Zip has shown the ability to reframe the business and set up operations for profitability.
- We were impressed with Zip’s execution in 1H, however the stock rallied into and out of the result, not one we are chasing into current strength, but it remains on our radar.
MM remains bullish on ZIP
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