Zip share price outlook and Q1 FY21 update in focus: broker wrap

Zip share price lower following trading update

Despite posting a set of record results as part of its Q1 FY21 trading update, Zip's share price was still bid lower during Wednesday’s session, finishing out the day down around 4%, at $7.58 per share.

The stock continued to trend lower on Thursday, down nearly 3% by noon.

By comparison, Afterpay’s share price has continued to rise, edging closer to the elusive $100 per share mark during yesterday’s session..

This comes after RBC analysts bumped up their price target on Afterpay from $83 per share to $107 per share, with the investment bank noting that 'ahead of an anticipated trading update later this month which we expect will show continued acceleration in top-line growth and accelerating customer adds in the US/UK.’

Read more about how you can buy, sell and short Afterpay here.

Importantly, while enthusiasm around Zip appears somewhat mixed – the company nonetheless posted a record set of results as part of its Q1 – on a year-over-year basis reporting:

• Quarterly revenues of $71.7 million, up 88%
• Record quarterly transaction volumes of $943.1 million, up 96%, implying annualised transaction volumes of approximately $3.8 billion
• Customers reached 4.5 million, up 114%
• Merchants came in at 34.4 thousand, up 69%

Looking at the company’s credit performance, Zip reported that its arrears had fallen to 0.91% in the September quarter, down from 1.33% in the June quarter, while net bad debts came in ahead of the market at 2.43%.

Turning to the performance of the recently acquired QuadPay, during the September quarter the company recorded:

• Transaction volumes of US$230.7 million, up 42%
• Revenues of $16.7 million, against stable transaction margins of approximately 2%
• 2.2 million total customers and 6.8 thousand total merchants
• Zip said it expects 'significant growth in the seasonally strongest quarter’, with a number of key sales and holiday events occurring, including Black Friday, Cyber Monday and Christmas.

Speaking of some of the company’s other initiatives, Zip Business – which was launched in Q1 and focuses on providing capital to small and medium-sized businesses on eBay – witnessed modest growth during the quarter, reporting revenues of $2.6 million, implying a quarter-over-quarter growth rate of 13%.

Management thoughts: A strong quarter ahead?

Commenting on the outlook, specifically on the trends witnessed thus far in Q2 FY21, Zip's Managing Director and Chief Executive Officer, Larry Diamond said:

'Locally, the product and merchant pipeline are extremely exciting, and we look forward to a number of announcements in the months ahead. The current quarter has begun solidly in all markets, which is seasonally the strongest as we run up to Prime Day, Black Friday, Cyber Monday, Christmas and Boxing Day.'

Maybe more importantly and speaking to the favourable changes in consumer behaviour currently being witnessed across the BNPL sector – Mr Diamond noted that:

'Customers are continuing to increase their online spend in response to COVID-19 supported by Zip's products that provide a better and fairer, digital alternative to the credit card.’

‘Data from the recent quarter continues to show the demise of the credit card model - in Australia, by way of example, credit card balances collapsed 24% YoY, while balances accruing interest fell 28%,’ Mr Diamond finished.

How brokers reacted

With the market seemingly unimpressed by the company’s Q1 update, below we compare how three top brokers reacted…

Shaw

Heading into what is considered a seasonally strong quarter for the likes of Zip and Afterpay, analysts from Shaw reiterated their bullish outlook on the stock, upping their price target in the process to $10.45 per share.

‘The trend is your friend and that which is getting bigger faster is becoming more valuable. Re-iterate Buy into the strongest quarter of the year with the most fertile conditions.’

Looking forward, Shaw analysts argued that:

‘The entire sector is a buy out to January, and this will be the best time to own the sector with Quad the best leverage.’

Elsewhere in the space, the broker also has a Buy rating and $5.00 price target on Openpay, while Afterpay is not in their coverage universe.

Macquarie Wealth Management

By comparison to Shaw, Macquarie analysts retained a bearish stance on the stock in spite of its record quarter, reiterating an Underperform rating and $4.95 price target on Zip.

Analysts from the investment bank said:

‘Growth in QuadPay’s revenue and customer numbers is enough to offset the weak growth being experienced in the ANZ business and will likely accelerate in the seasonally strong quarter.’

However, it was flagged that this growth has the potential to be impacted by increased competition in the BNPL space, with it being noted that ‘the imminent launch of PayPal in the US limit growth rates of existing players, this could drive a material de-rating.’

Zip trades at a steep discount to APT, which itself trades on a staggering 47x sales multiple; yet with no earnings and a price to sales ratio of ~17x, Zip, while ‘cheaper’ than APT, continues to boast a demanding valuation.

Royal Bank of Canada

Analysts from the Royal Bank of Canada (RBC) – like Shaw – viewed Zip’s trading update positively, noting that although growth has slowed somewhat across its core business; its US, Quadpay business, beat on expectations. More positively still, RBC argued that the assumption is that:

‘Zip’s higher-quality customer profile to somewhat mitigate potential risks associated with government stimulus roll-off in the near term. We remain positive on the name given multiple growth options both domestically and offshore, and as the business continues to expand its presence in the Australia market.’

RBC has an Outperform rating and $10.00 price target on Zip, implying moderate upside from current price levels.

What are your thoughts on Afterpay and Zip...

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