The Zip share price slid 15% in August. What went wrong?

The Zip Co Ltd (ASX: ZIP) share price has had a tumultuous 18 months, to say the least.

It seemed like its fortunes were finally turning in July as sentiment emphatically returned for ASX buy now, pay later (BNPL) shares.

The Zip share price staged an incredible 159% resurgence in July. There was notable news during the month as the merger with Sezzle Inc (ASX: SZL) was officially scrapped and Zip released its fourth-quarter update.

But above all else, it appeared as though ASX BNPL shares were back in vogue.

The Sezzle share price skyrocketed 215% in July while the Splitit Ltd (ASX: SPT) share price doubled.

But the music stopped in August as ASX BNPL shares failed to keep the party going. The Zip share price tumbled 15% across the month, Sezzle shares slid 18%, and Splitit shares were dumped 21%.

It appears that investor sentiment waned throughout the month and Zip's FY22 results only compounded the fall.

But even still, the Zip share price has doubled since the end of June. 

Pick a series of time periods and you'll likely get starkly different performances, such is the wildly-swinging nature of the Zip share price.

Why has the Zip share price been sliding?

I'd say a key factor here is investor sentiment, which continues to turn on a dime.

But the market didn't appear too impressed with the results Zip delivered at the end of the month.

Let's take a look at some of the key points.

Customer count

Zip introduced a new metric in its FY22 results, disclosing active customers for the first time.

In order to be considered active, a customer must have had transaction activity in the last 12 months.

Prior to this, Zip had simply been disclosing total customer numbers, which were being inflated by inactive customers.

Here's how these figures measure up across Zip's geographical segments.

Separate to this, Zip also restated its total customer count in the US, removing 600,000 accounts from the figure disclosed in 4Q22 as they were "not yet activated as at 30 June 2022".

Unit economics mixed

As I discussed when previewing Zip's FY22 results, unit economics tell an important tale of the company's underlying performance.

The key metrics here are revenue margin, cash cost of sales (which includes bad debts), and cash transaction margin.

These metrics encapsulate how well Zip can convert the transaction value that flows through its platform into revenue. And from there, how much of this revenue it can successfully collect from customers.

Zip managed to buck a trend of declining revenue margins, improving from 6.8% in FY21 and 6.7% in HY22 to 7.1% in FY22. 

But rising bad debts led to an increase in cash cost of sales, jumping from 3.7% of TTV in FY21 to 4.8% in FY22.

As a result, the company's cash transaction margin took a hit, dropping from 3.1% to 2.3%. 

Zip has a medium-term target range of between 2.5% and 3%, so investors will be expecting this margin to improve as the platform scales and bad customers are weeded out.

Net loss blows out

When you take a cursory glance at Zip's income statement, one thing, in particular, stands out: the big negative number on the bottom line.

Zip served up a net loss of $1.1 billion in FY22. A frightful number, especially in the context of the company's market capitalisation of $592 million.

But upon closer look, this $1.1 billion loss included an $821 million impairment charge relating to goodwill and intangibles. More specifically, the carrying value of some of Zip's overseas businesses has been written down on the back of slower forecasted growth rates and rising interest rates.

So instead of looking at the bottom line, Zip believes a better reflection of the underlying business is cash earnings before tax, depreciation, and amortisation (EBTDA). Here, the company posted a cash EBTDA loss of $207 million in FY22, a notable increase from the $23 million loss in the prior year.

This came as the company's cost base grew at a faster clip than revenue. Bad debts and expected credit losses more than doubled to $276 million, employee expenses surged 89% to $184 million, and marketing expenses jumped 63% to $120 million.

But green shoots may be emerging after the ANZ business generated positive cash EBTDA of $28 million, up from $8 million in the prior year. Importantly, cash operating expenses grew by just $2 million to support a $22 million rise in gross profit.

What next for the Zip share price?

The Zip share price has cratered 81% this year. And there could be further downward pressure ahead as Zip shares will soon be ousted from the S&P/ASX 200 Index (ASX: XJO) in the upcoming September rebalance.

In an effort to accelerate its pathway to profitability, Zip has committed to reining in costs and focusing on the core business. Internally, this has been dubbed 'Operation Blue Sky'.

Zip is targeting cash EBTDA profitability in the first half of FY24.

The market will be closely watching how well Zip is able to execute these cost-cutting initiatives. And how this may impact the company's growth rates and competitive position going forward.

In the wake of Zip's FY22 results, analysts at Macquarie maintained their underperform rating on Zip shares. Analysts at UBS also maintained their sell rating, with the 12-month price target unchanged at 45 cents.