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Q3 update: Why the Zip (ASX:ZIP) share price is in focus

The Zip Co Ltd (ASX:ZIP) share price is under the spotlight after releasing its FY22 third quarter update.

The Zip Co Ltd (ASX: ZIP) share price is under the spotlight after releasing its FY22 third-quarter update.

Growth continues for Zip

The buy now, pay later business told investors how it performed in the three months to 31 March 2022.

Group quarterly revenue increased by 39% year on year to $159.2 million. This came after transaction volume growth of 27% to $2.1 billion.

Customer numbers rose 78% to 11.4 million and merchants on the platform increased by 90% to 86,200.

Merchant wins

There were two key merchant wins that Zip told investors about, which are expected to drive revenue. It said that its merchant pipeline in Australia and the US remains “very healthy” with a number of additional large enterprise partners at the contracting stage.

One win was Best Buy Co Inc (NYSE: BBY). During an initial pilot, Zip’s product will be used across Best Buy’s online and in-store platforms in the US. The pilot is expected to start during the fourth quarter.

eBay Inc (NASDAQ: EBAY) was the other merchant. Zip Pay and Zip Money will be available as payment options to buyers on eBay Australia in the coming months.


The profitability of the business can have an important impact on the Zip share price. It did say that its cash transaction margin was strong at 2.3% for the quarter, up from 2.1% in the first half of FY22.

Zip said that credit losses increased outside of its target range due to both internal and external factors. So it’s implementing several adjustments to its risk settings to drive down credit losses toward target levels, while still maintaining growth.

In the US, adjustments have led to an immediate improvement, with losses from the February and March cohorts tracking at 2.2% of the total transaction value (TTV). Further optimisation is expected to see losses continue to trend towards the target level of 2% and below in the medium-term.

In Australia, adjustments to risk settings for new and existing customers have been implemented, along with initiatives for portfolio management and collections, which combined are expected to see performance trend back to target levels in the first half of FY23.

Zip said that its Australian credit performance at 31 December 2021 was 1.64% in arrears and 2.83% of net bad debts. At 31 March 2022, the arrears had increased to 2.29% and net bad debts had risen to 3.4%.

FY22 second-half losses are expected to remain at a similar level to the first half (around 2.6%) as losses from the first half’s transactions are realised. It’s expecting improvement in the fourth quarter of FY22 and into FY23, trending towards its medium-term target of less than 2% of TTV.

In terms of costs, Zip is expecting to decrease its global ‘people costs’ by around $30 million in FY23. This will include an internal re-organisation. Additional initiatives across procurement and automation are also underway, the benefits of which will be felt in the coming quarters.

Final thoughts on the Zip share price

Zip shares have fallen a long way. The growth rate in percentage terms is slowing. Arrears are rising. Competition and increased regulation loom.

However, it was good to see that the cash transaction margin improved. However, I’m not sure if the business will be able to attract strong market interest again. Investors don’t seem excited by the Sezzle Inc (ASX: SZL) acquisition.

There are other ASX growth shares I’d rather look at.

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