The Zip share price lost 7% in FY23 but could a turnaround start this August reporting season?

The Zip Co Ltd (ASX: ZIP) share price closed flat on Friday afternoon at 42 cents.

The troubled buy now, pay later (BNPL) share lost ground in FY23, falling from 44 cents at the close of trade on 30 June 2022 to 41 cents on 30 June 2023. That’s a 7.3% dip.

Let’s take a look at what happened for Zip in FY23.

Zip share price unable to sustain minor surges in FY23

As the chart below shows, the Zip share price had a very tumultuous year.

It began the year well.

In July 2022, Zip shares soared over a two-week period to a 52-week high of $1.72. That represented a 290% gain from where it started FY23.

The share price spike was prompted by the announcement that Zip and Sezzle Inc (ASX: SZL) had agreed to terminate their merger agreement due to deteriorating economic conditions.

The price growth was propelled by a company update on 21 July. It revealed group quarterly revenue of $160.1 million, which was a 27% increase year-over-year.

This was driven by a 20% increase in transaction volume to $2.2 billion. Customer numbers also lifted by 64% to 12 million.

But the share price growth was very short-lived. As was a number of share price lifts during the year. Zip simply couldn’t sustain any positive movement and ultimately finished the year in the red.

Business strategy back-flip

Following a 95% decline in the Zip share price – from a historical peak of $13.05 in February 2021 to a trough of 43.5 cents in June 2022 – the company announced a complete change of strategy.

It dumped its grow-or-die global strategy and announced it would narrow its focus to the Australia/New Zealand and North America core markets, and target profitability instead.

Zip mapped out its plans to become cash flow positive in its annual report in late September.

It has since exited 10 of its 14 markets, including the United Kingdom, India, and Singapore. It has also sold off assets in these markets, bringing cash to the balance sheet.

In its last quarterly report for the March 2023 quarter, Zip reported group quarterly revenue of $182 million. Transaction volume was $2.2 billion.

The company also said it “remains on track” to deliver its two key financial goals.

They are “to deliver up to 50% Core Cash EBTDA improvement in H2 FY23 versus the ($33.2m) result for H1 FY23” and “group cash EBTDA profitability during H1 FY24”.

Regulation threat finally determined

A long-standing headwind for the Zip share price — and every other BNPL stock — was the anticipated tightening of Australian Government regulation for the BNPL space following an extended inquiry.

The government finally made a decision in May. It went with a middle-ground option that Zip was actually pretty happy about.

The strategy brings BNPL providers under the Credit Act, just like credit card companies. However, the rules won’t be as strict.

BNPL providers will now need to meet responsible lending obligations by checking if customers can afford to pay back BNPL debt before allowing them to use their products.

The industry had been exempt from major regulation because BNPL providers do not charge interest the way credit card providers do.

But Zip was already doing these types of affordability checks, so the new regulations may have less impact on its business.

What’s next for the Zip share price in FY24?

Shareholders will want to see two critical milestones achieved in the early part of FY24.

The first is delivery on Zip’s goal of turning the US business cash flow positive by the end of FY23. We’ll find out in the upcoming August reporting season whether the company has achieved this. (The Australia/New Zealand business has been cash flow positive for four years already.) 

Getting the US business cash flow positive would be a big step in Zip’s new strategy.

It is the key to Zip’s second major financial goal, which is making the group cash flow positive by the first half of FY24. 

We’ll find out in the February 2024 reporting season whether Zip managed to get this done.  

If the company achieves these two feats, then this, in combination with the regulation question now being resolved, may put Zip shares in calmer waters for FY24.

It’s worth noting that the pro traders are feeling far less negative about the Zip share price.

In mid-May, Zip was still one of the top 10 most shorted stocks of the ASX, with 10.25% of its shares shorted. 

But Zip is no longer in the top 10.

According to ASIC’s latest report, the shorting position on the Zip share price has more than halved to 4.85% in less than two months.

Hmmm.