Under the Spotlight AUS: Zip (ZIP)

Zip ($ZIP) by name, zippy by nature. The buy now, pay later (BNPL) provider’s shares have been on a tear, soaring 26% since it delivered a surprise earnings upgrade in April. 

Well established in Australia, Zip has pushed ahead with its ambition to snare a bigger share of the huge U.S. BNPL market – estimated to be worth US$130b last year. 

Founded in 2013, Zip was key in bringing BNPL to the mainstream alongside rivals like Afterpay, which is now owned by Block ($XYZ). BNPL revolutionised the payments industry by offering access to short-term loans that can be paid back in instalments. It’s given banks – and their credit cards – a run for their money. BNPL players make money by charging merchants a fee on each transaction, as well as customer fees and interest costs depending on the product. 

We last looked at Zip in 2021. Back then, the stock was soaring as online shopping boomed during Covid. Much has changed since. A proposed merger with Sezzle ($SEZL) was scrapped and Zip shares slumped 95% from their peak amid concerns about profitability. But a new CEO and chair have sharpened focus on earnings growth. The stock has responded with an almost 700% rally from its low of $0.25 in October 2023. 

Stars and swipes

Investors have been buoyed by Zip’s push to secure a great share of the U.S. BNPL market. The upside there is that adoption is behind other countries: BNPL accounts for 6% of e-commerce in the U.S. compared to 15% in Australia and 23% in Sweden. Goldman Sachs forecasts this payment method will grow to 7.5% of the U.S. e-commerce market by 2027. 

Active customers in the U.S. have grown from 3.8m to 4.2m over the past year. Zip offers a ‘Pay-in-Z’ option with four and eight instalments. The company is targeting the 100m+ Americans that have trouble accessing traditional finance, like credit cards, or have to pay higher costs to do so. Zip’s U.S. customers tend to be female, aged 25-44 and live in the southern U.S. states balancing work and family. The majority of its total transaction value (TTV) comes from non-discretionary spending. Translation: most customers are using it as a cash flow management tool. There are just under 25,000 merchants using the system (including Temu and GameStop). 

The impact of the drive into the U.S. can be seen in Zip’s earnings. While its total Q3 revenue increased 26.2% year-on-year to $276.3m, U.S. revenue rose 51.4% to $173.2m. U.S. transactions rose 30.4% YoY and TTV increased 47.1% YoY to $2.36b – well above the $894.5m recorded in Australia and New Zealand. Q3 loss rates are expected to be 1.3%-1.5% of TTV, which is below the target range of 1.5%-2.0%. It’s this momentum that allowed Zip to upgrade its FY25 guidance for earnings before tax, depreciation and amortisation from $147m to at least $153m. 

Zip faces competition from U.S. rivals like Affirm ($AFRM). It’s looking to boost growth through 0% loans in an attempt to win new customers and steal market share from credit cards. Meanwhile Klarna grew its active customers to 100m in Q1. However, its Q1 loss grew too, from US$47m a year ago to US$92m, even as revenue increased 15% to $701m. Klarna has put its U.S. IPO on hold. Goldman Sachs estimates Klarna, Afterpay and Affirm each have a quarter share of the BNPL market, while Zip accounts for 4%. The challenge for Zip will be to win share, cap losses and protect margins in a very competitive market. 

New money

Zip’s business in Australia and New Zealand isn’t growing as swiftly as in the U.S., but it offers plenty of opportunity to grow earnings through new products. Revenue was down 1.3% YoY in Q3 and TTV rose 12.6% YoY. Active customers fell 6.8% YoY to 2.07m. 

The ANZ business is more mature: around 10% of the Australian population use Zip products. The company views that pool of users as a ‘strategic asset’. And the demographics are more mature as well: the average age of a customer is around 40 years old. 

That’s a customer base that has different financial needs than those in their 20s or 30s – and may want new products other than the popular Zip Pay, Zip Plus or Zip Money. The launch of personal loans in January hints at where the company is heading. However, CEO Cynthia Scott told analysts on Zip's quarterly earnings call that they would have to wait until the full-year results to get some more colour on potential products. 

Cashed up

Zip has strengthened its finances over the past year. A stronger balance sheet provides the means to fund its growth ambitions, especially in the competitive U.S. market. 

The balance sheet was buttressed through a $267m equity capital raising last July. The company raised $217m from institutional investors – these funds were used to pay off a corporate debt facility. Another $50m was raised from retail shareholders. New shares were sold at $1.56, handing these investors a tidy profit so far. Zip has $204.5m in available cash and liquidity, and no corporate debt.   

The launch of a $50m share buyback program in April is a sign of management’s confidence in its balance sheet and the value they see in the stock at current levels. Around $18m worth of shares have been repurchased so far.

Giving credit

Zip is winning credit from investors for its push into the huge U.S. BNPL market – and the double-digit growth that it’s delivered so far.  

It’s an ambitious strategy that sees it going head-to-head with some of the industry’s biggest guns. Management needs to be sharply focused on sustainable earnings growth and minimising losses if it wants the share price to continue to zip along.  

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.