OPINION: Zip shares are up 35 per cent in a month, but until it can prove lower loss rates and profits are sustainable it will have a hard time winning investors’ faith.
Investors can be forgiven for rolling their eyes ferociously at the suggestion from Zip co-founder and chief executive Larry Diamond that after nine years in business
Investors have made it clear that the days of profitless growth from technology companies are done for now, and radical surgery is required to make these businesses investible again.There’s a fair way to go before Zip is in the black, but Diamond and co-founder Peter Gray are doing and saying the right things. The rally in the group’s share price says some brave investors are listening, although this will remain a highly speculative play for a long time.
Processing costs are being cut, and merchant and consumer pricing is being revised to improve margins.Crucially, the process of reducing losses by reining in bad debt is underway. Gray says Zip is being more selective about which customers get credit, and more careful about expanding in sales channels it knows carries more risk. Zip’s US loss rate fell to 2.7 per cent of total transaction value in the quarter, but further improvements led to that declining to 2.2 per cent in late June.
While Gray says every BNPL player in the United States is adjusting to the sector’s new realities – that is, a lack of investors interest and the new push for profitability – this market remains the big prize.
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