The Zip Co Ltd (ASX: ZIP) stock price has endured a rough trot in 2023. In as little as ten months, the payments company has witnessed the incineration of $200 million in market capitalisation, now valued at a touch over $231 million.
However, could the eviscerated stock price present an entry point as the buy now, pay later provider shifts its focus toward reaching profitability? After all, the business presently trades on a price-to-book (P/B) ratio of 0.9, valuing it less than its net assets.
The much-referenced Warren Buffett quote laments, "Be fearful when others are greedy and be greedy when others are fearful." Does the once-enshrined Zip stock make for a bargain Buffett buy, or is it an exception to the common investing motto?
A leap of faith into the unknown
Companies can look 'cheap' based on one or two fundamental metrics, such as the P/B ratio. However, a few green ticks here and there aren't enough to determine whether a potential investment presents value.
It appears Zip is now heading in the right direction, waking up to the need to morph into something more financially sustainable. As a result, the company reduced its negative free cash flow to $250 million in FY23, down from a $782 million outflow in the prior financial year.
Still, an enormous question mark hangs over the Afterpay rival… can it deliver a profit?
According to Zip's FY23 annual report, the company is targeting positive cash EBTDA (earnings before taxes, depreciation, and amortisation) in the first half of FY2024. If achieved, this would demonstrate an ability to generate more revenue than cash expenses (including interest) in a high-rate environment.
However, since listing, Zip has not produced a net profit after tax (NPAT) as a group, prioritising growth instead. As such, Zip stock could look cheap based on book value, but earnings are generally what drives the share price over the long term.
Who is buying Zip stock?
Having said all of the above, it is worth noting that the past does not always reflect the future. Zip has some costly line items, such as salaries and corporate financing costs, that could make for areas of improvement.
Besides, some key people in the company seem optimistic about the future of the Zip stock price. For example, independent non-executive director Meredith Scott and Zip chair Diane Smith-Gander added to their holdings last month.
- Scott purchased $9,749 worth of Zip shares on 28 September
- Smith-Gander purchased $30,518 worth of Zip shares on 28 September
Such insider trades can provide a glimpse into the sentiment held among those most privy to the ongoings of the business.
Note: An earlier version of this article incorrectly used EBITDA in place of EBTDA. Zip expects to generate positive cash after interest expenses in the first half. Furthermore, the company also derives revenue from interest on credit and customer fees, not relying solely on merchant fees.
