Buy now, pay later provider Zip’s shares fall amid fears it is in ‘cycle of death’

Zip’s shares have plunged by 79 per cent in the past year, while its latest report revealed the huge amount of cash it had burned through. Photo / NCA NewsWire

With fears that the buy now, pay later sector could be wiped out as it struggles in the current economic climate, Australian provider Zip has seen its shares plummet by 16 per cent despite finally recording a profit in the US at the end of last year.

Zip’s shares tumbled to just 70c on the ASX amid fears it could run out of cash before leaving markets outside of the US and Australia – down from highs of A$12.36 in February 2021. Its shares are down a whopping 79 per cent in 12 months.

It had already haemorrhaged money from its operations in the past financial year with a whopping $1 billion loss, as it announced the closure of its United Kingdom operations.

It also revealed that its outfits in Europe and the Middle East were burning through about $50 million a year.

But Zip’s latest report for the second quarter revealed that it has continued to burn through cash down from $140.7 million from September 30 to $78.5 million by the end of December.

RBC Capital Markets analyst Wei-Weng Chen warned the level of cash burn implied that Zip had just 7.5 months of liquidity, which the company has denied.

Payments consulting firm McLean Roche’s chief executive Grant Halverson described Zip as being in a “cycle of death” and said the company would need to make profits as soon as possible given the company had not been profitable since 2013.

“They need to cut credit losses, which means stopping customers’ spending, which means they leave or get cancelled by Zip – but they have plenty of other options,” he told the Australian Financial Review.

“PayPal is saying they are No 1. You can see this in ANZ where spending was already slow – now it’s in decline.”

He added customer numbers had also declined by 38 per cent in the US, Australian and New Zealand market down from 12 million to 7.4 million.

However, Zip said transaction numbers were at record levels, up 15 per cent at 22.6 million in the quarter, as was the volume of transactions, up 22 per cent at $2.7 billion – despite the cost of living crisis squeezing consumers.

“Zip remains confident that based on its current trajectory and plan, including actions to improve cash flow, margins and costs, and outcomes from the (Rest of World) strategic review process, that its current available cash and liquidity position is sufficient to see (it) through to generating positive cash flow,” the company told investors.

However, the company is also closing its Singapore and Mexico operations in a bid to stem losses.

“We are very pleased to deliver another strong quarter of record volumes despite the challenging external environment and adjustments to our risk settings,” said Zip co-founder, global CEO and managing director, Larry Diamond.

“During the quarter Zip continued to make great progress on the strategy to deliver sustainable growth, right-size our global cost base and accelerate our path to profitability.

“We continue to provide increased benefits to both customers and merchants in today’s high cost environment and are well-positioned for any potential future regulatory changes.

“The underlying business remains strong, and we are pleased with the benefits and reduction in cash burn from the ongoing simplification of the business footprint and focus on core products and core markets.

“In the current environment of heightened inflation and cost of living pressures, Zip continues to provide a simple, fair and easy to use product that customers can use everywhere and every day, creating a world where people can live fearlessly today, knowing they’re in control of tomorrow.”

Revenues from its US business increased 28 per cent on the previous quarter to $85.7 million, while Australian revenues were up 7 per cent at $88.6 million in the same period.

Zip’s results come as BNPL users could face restrictions under new regulations being canvassed for the sector with full credit checks in play. Zip has supported option two where the industry would be subject to scalable credit checks.

The Australian Retail Credit Association (ARCA) continues to push for the sector to be regulated to protect consumers from harm.

ARCA’s research showed Australians’ increasing reliance on BNPL products with almost half having used a service, while a 34 per cent have been late on their payments.

Australians who have used BNPL services are more likely to have more than one account, its research found.

ARCA CEO Elsa Markula said the time has come for BNPL to be recognised and treated like other consumer credit products.

“We’re happy for the industry to move beyond tying itself up in knots asking how BNPL should be characterised, and instead now move to ensure that BNPL is properly integrated within the existing credit regulatory and reporting framework,” she said.

The Association believes the credit reporting system will provide a recognised, robust, and objective means to verify the creditworthiness of BNPL users and help ensure BNPL credit is only offered to those who can afford it.

Markula also noted that participation of BNPL in credit reporting will help many consumers who don’t otherwise have a strong credit history.

“Consumers must be able to reap the benefits of the good payment history recorded on their credit report,” she explained.

“With BNPL included in credit reporting, consumers’ responsible and managed use of BNPL can help them when they need to apply for credit to support their next life stage, whether that’s buying a car or seeking a home loan.”