Investors unconvinced as Zip Co shares tumble as update falls flat

Zip shares tanked 11 per cent despite the buy now, pay later operator’s attempts to reassure on its outlook.

Zip Co shares tumbled 11 per cent on Wednesday as investors appeared unconvinced by the buy now, pay later operator’s attempts to reassure on its outlook as interest rates push higher.

After its shares tumbled to multi-year lows through the day’s trade, ASX-listed Zip, in an update to shareholders, said its underlying business remained strong and that it was “well placed to respond to, and offset, the effects of rising interest rates”.

Following the update, Zip shares came under renewed pressure, closing the day down 11.4 per cent at 46c, marking its lowest close since April 2016. The stock has lost 90 per cent of its value since the start of the year.

“We have been clear that in response to current market conditions our strategic priorities are to focus on our core business, both products and regions, and accelerate the group’s path to profitability,” Zip co-founder and global CEO Larry Diamond said.

“In an environment where wage growth is falling behind heightened inflationary pressures, affordability becomes an even more important priority for consumers as they budget each month.

“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.”

The underlying business remained strong, with “a solid pipeline” of merchants coming onto the platform, including Qantas, eBay and Best Buy, the company said.

Zip also outlined some of the steps it has taken to grow the business and accelerate its path to profitability, including cost-reduction initiatives in its global operations that it expects will deliver over $30m in pre-tax earning benefits in 2023.

“The company is also well placed to respond to, and offset, the effects of rising interest rates, with a series of initiatives underway including consumer fee increases, merchant repricing, increased customer repayment velocity, and weighted average margin benefits from the refinancing of legacy receivables,” Zip said.

“The US business in particular is resilient 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 2 basis points per transaction.”

The update came days after The Australian’s DataRoom column reported that Zip’s business in Britain was under heavy scrutiny from the directors of the buy now, pay later provider, with suggestions the board had appointed a consultant to consider options for that part of the business.

Market experts believe that Zip’s road to recovery involves staging an exit from the US and Britain and focusing on its profitable Australian operation.

“Consistent with our commitment to right-size our global cost base and deliver group profitability during fiscal 2024, Zip continues to review its capital allocation for its Rest of World businesses to accelerate the group’s path to profitability and deliver greater value to shareholders,” Zip said on Wednesday.

Adding that it had “more than sufficient headroom” to support transaction growth, Zip said it remained well-funded, with $303m available in cash and liquidity as of the end of March, as well as a further $24m raised in April.

It expects this to be sufficient to see the company through to cash flow break-even in 2024.