Zip Co, The Lazarus Of BNPL

Small Caps | Jul 05 2024

Following its near-death experience last year, BNPL provider Zip Co has made a strong comeback. Evans & Partners has initiated coverage.

-Zip Co posts a solid March quarter, boosted by the US
-Apple's BNPL exit may prove beneficial
-Evans & Partners initiates coverage

By Greg Peel

Zip Co ((ZIP)) has had a rough few years. The buy now, pay later (BNPL) company rode the explosion of the sector, and the boost provided by the covid years, to a share price over $10 in early 2021. Despite warnings of overvaluation, Zip rival Afterpay was acquired by US-based Square, nowadays Block ((SQ2)), for a head-spinning price in late 2021. But by then, Zip's fortunes had soured.

In September last year, Zip shares were trading under 30c.

But just when it looked like Zip might bite the dust, a comeback began.

Last April, Zip provided a March quarter trading update that surprised to the upside, driven by outperformance in US total transaction value growth and Australian revenue yields. UBS lifted its cash earnings forecasts by an average 19% in reflection of operating leverage from lower net bad debts and improving funding cost.

While A&NZ proved the underperformer during the March quarter, UBS assumed stabilisation was ahead in FY25, after which growth can resume for the region.

Ord Minnett continued to see potential for positive surprises in the quarters ahead and retained a Buy rating, with a $1.55 target (up from $1.08). UBS also retained its Buy rating and increased its target to $1.55 from $1.43.

Apple Gift Card

Mid last month, Apple announced it was shutting Apple Pay Later for new customers and instead would partner with BNPL providers and financial institutions. Citi saw this as a positive for Zip as it removed a competitive threat.

It will be interesting to see, mused Citi, which BNPL providers Apple decides to add, especially in the US, as it could help increase the distribution footprint for Zip. The likely negative is the addition of free BNPL options such as Afterpay could reduce the need for customers to use Zip's Shop Anywhere offering.

Apple nonetheless touted an alternative option set to roll out later in 2024, likely in line with the release of its new operating system and iPad model in the northern "fall".

"Starting later this year, users across the globe will be able to access installment loans offered through credit and debit cards, as well as lenders, when checking out with Apple Pay," Apple said in its statement. "With the introduction of this new global installment loan offering, we will no longer offer Apple Pay Later in the US".

That being said, Citi still sees plenty of growth potential in the near term in the US given BNPL is under-penetrated and Zip's focus is on the near prime market. The broker is rating the shares as Buy with a $1.40 target.

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