Should I Buy Z1P Shares?
Should I Buy Z1P Shares?

Shares in ASX listed Zip Co (ASX: Z1P) have made investors over 15% this year to date. However, back in February shares were changing hands for over $14.53 a share.

We covered Zip shares back in March which outlines a few reasons why this might have been. Today, we’re taking another look into ASX:Z1P and asking Should I Buy ZIP Shares in 2021?

Zip Shares have undergone massive growth since listing on the ASX in 2012 at a price of less than $1 a share. Zip shares have been surrounded by a lot of hype in the past few years and it’s easy to see why with such impressive gains.

About Zip Shares Shares

Zip Co Limited (Z1P) offers point-of-sale credit and payment solutions to customers and providing a variety of integrated Retail Finance solutions to merchants across numerous industries, both online and in-store. The company operates in Australia and New Zealand. They are a key Buy-Now Pay-later provider.

Zip Co is also currently in the process of expanding into North America under the Quadpay banner and the UK. Zip is also expanding into the European Market through their acquisition of Twisto Payments and also entering into an agreement with UAE-based BNPL leader Spotii Holdings.

Zippay Shares Grew Investors Money 10x

The price of Zip Shares has absolutely rocketed since listing back in 2012 as one of the first ASX listed Buy-Now-Pay-Later companies. Zip Shares actually IPO’d before market-leading Afterpay (APT.ASX) who actually listed in 2016 at $1 per share.

ASX Z1P Share Price:

The Z1P Share Price is currently trading at $7.28 per share and has a market cap of ~$4.2 billion dollars.

Zippay (Z1P ASX) shares have increased significantly in value largely due to investor sentiment surrounding their ever-increasing year-on-year revenue growth and capturing of market share.

Zip Shares and The BNPL Industry

The number of active buy-now-pay-later accounts continues to increase, see below data collected by ASIC in regards to active accounts from 2015 – 2019.

There are over 3.7million active BNPL accounts in Australia as of 2019. However, this number is to be significantly higher now.

Zip Shares Price
Number of Active BNPL Accounts Australia: Source ASIC

BNPL services in the Asia-Pacific region will more than double over the four years to 2024, growing largely at the expense of credit cards, bank transfers, and prepaid cards, Fidelity National Information Services Inc. said in its Global Payments Report 2021.

BNPL accounted for 10% of all e-commerce transactions in Australia in 2020, FIS said. This bodes well for the Z1P ASX Share Price in the future.

How Much are Zip Shares Worth: Current Price

At the current price of $7.28 per share and a market capitalization of AUD $4 billion. At the beginning of the year, ASX Z1P shares reached a high of $14.38 before coming back down to the current prices. Today’s price sits at the middle of the 52-week range of $4.96 – $14.53. The current share price is down ~48% from Zip Shares five-year high.

Revenue in ASX:Z1P has been growing significantly year on year, we have also added the revenue growth of APT on the chart for comparison.

Revenue Performance of Zip Shares
Source: Raw Data from Zip Financial Reports.

Provided Z1P has revenues of A$248 million and APT of A$644 million and market capitalizations of $4 billion and $30 billion respectively, there is ultimately some disparity in the price to sales multiple.

Z1P has a price to sales multiple of around 16.45x whilst Afterpay currently has a price to sales of 45x. Here our Should I Buy APT Analysis

Z1P co hold approximately $220 million cash on their balance sheet compared to Afterpays ~450million. However, we consider cash on hand an irrelevant measure when assessing these companies as both have well-established credit facilities at their disposal to fund operations.

Year to date, Afterpay shares are up a massive 82%, compared to Zip Shares at 18%, there seems to be some disparity between the two operations. It’s very hard to tell currently if APT is worth the massive 45x price to sales ratio that it is priced under or if Zip Co is undervalued at the current 16.45x price to sales ratio.

However, one thing we know for sure is that BNPL is still in its infancy in the US, Europe, and the UK and we expect massive sales growth from both companies moving forwards. It’s more difficult however to tell if long term once the growth stops whether investors are still keen to justify the differentials in pricing ratios between the two companies.

Z1P Vs Afterpay Share Price
Z1P Vs Afterpay Share Price

Z1P’s Recent Q4 Update:

On the 22nd of July Z1P released their record-breaking Q4 results,

KEY HIGHLIGHTS (Q4 FY21):

  • Record group quarterly revenue of $129.9m (up 104% YoY).
  • Record monthly revenue in June, annualising at $537.2m.
  • Record quarterly transaction volume of $1.8b (up 116% YoY).
  • Record transaction numbers for the quarter of 14.2m (up 230% YoY).
  • Customer numbers increased to 7.3m (up 87% YoY).
  • Merchants on the platform increased to 51.3k (up 84% YoY).
  • Zip continued to executeon its global strategy, agreeing to acquire the remaining shares in both TwistoPayments (Europe) and SpotiiHoldings Ltd (Middle East). The quarter also saw Zip launch organically into Canada and Mexico.
  • Completed an extension and increase to the Goldman Sachs debt facility in the US, now US$300m(with the option to increase to US$400, supporting $5b+ in TTV), whilst also securing a material improvement to the facility’s weighted average cost of capital.
  • Strong growth in app downloads continued globally with over 1.5m downloads for Zip US (Quadpay) (now 5.8m in total) and 241k downloads for Zip ANZ (now 2.8m in total).
  • Maintained market leading BNPL margins with revenue as a % of TTV at 7.2%, while capital efficiency remains extremely healthy with the book recycling every 3 months on a blended basis.
  • Raised $400 million through the issuance of zero coupon senior convertible notes

“Record numbers delivered across the business in all regions. We are now a truly global player”

ZIP Shares Partnership with Amazon and eBay

On the 26th of August 2020, Zip Co announced to the market that they had secured a deal with eBay to offer it’s 40,000 Australian small and medium-sized businesses the opportunity to access working capital via the eBay marketplace. Whilst a good deal, we don’t see this as a massive game-changer for Z1P ASX.

On November 7th 2020, Zippay Shares also announced to the market a deal with the massive US-listed Amazon. Zip Co is the first buy now, pay later company to be provided with this access to Amazon. This deal provides Zippay with access to become the checkout option on over 125 million products on Amazon’s Australian Marketplace.

Whilst both the above deals are good, we really are not even concerned with the Australian only based deals. The massive growth is going to be coming from Zippay scoring a deal with the US arm of either of these operations. Both the deals pave the way for this to occur, however, it will be a massive game-changer for any BNPL company should they become one of the preferred payment gateways for say an Amazon US or eBay US.

ZIP’s Regulatory Risk

Zippay owns the risk and assessing the risk of loaning this money to the customer. Zip has a duty of care to respect customers’ ability to pay. It benefits nobody if customers are provided with a massive limit that they simply cannot afford to repay as Zip would potentially end up losing a customer and the customer will stop utilizing Zip.

ASIC has already investigated BNPL and customers have decided that they want to adopt BNPL over the much more expensive credit card. ASIC has already validated that 4/5 Millenials want to use BNPL products in the subsequent 12 month period.

In our opinion, there are much better controls that Zippay has implemented in their backend to ensure the responsible issue of credit. The big 4 banks are out of touch with Millenials and their needs. For example, there are many stories online about university students with part-time jobs being issued credit cards through the big 4 banks with 16k limits and 18% interest rates. One will never understand how this is a responsible issuing of credit.

Zippay Formiddible Competition?

Whilst many people may believe BNPL is a single box to fill all, most BNPL providers actually operate in very different verticals and niches. Whilst most believe the market leader is Afterpay, this is simply not the case in Australia. One needs to remember some of the legacy operators such as Certegy actually have a substantial share of the pie.

Afterpay and Zippay Shares were largely similar in transaction volume in FY2018 and FY2019.

Share of BNPL Products
The total value of buy now pay later transactions (FY 2016–17 to FY 2018–19): Source

Taking a look at Key Performance Indicators for both Afterpay and Zippay in both of their respective HY21 reports we can establish the following.

Key Performance IndicatorAfterpay SharesZippay Shares
Annualised Volume$9.8billion$7.5billion
Annualised Revenue~800million*$480million
Active Customers13.1million5.7million
Active Merchants74.7k38.5k
Source: Afterpay and Zippay HY21 financial reports.

The addressable target market for Buy-Now-Pay-Later and ASX: Z1P is massive. You can now start to see why both Afterpay and Zippay are looking to take their operations abroad and really try and capture market share in the US, EU, and UK. The USA Addressable Global Market is over 12x bigger than that in Australia.

Should I Buy ZIP Shares: Prophet’s Take

Prophet is currently sitting on the sidelines of the BNPL sector. Whilst we strongly believe this sector will continue to experience massive growth we are waiting to see if we can score shares cheap on any large pullbacks. If any Zippay shares score a deal with any of the US arms of eBay or Amazon.com, we will also revisit our thesis.

Prophet is bullish on both Zippay and Afterpay, however, we are awaiting either a massive catalyst or a large pullback representing a great entry point prior to investing our cash.

Please Remember all Articles Published on Prophet Invest are Opinion only

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