Zip boss frustrated by stock's valuation relative to Afterpay

Peter Grey, theco-founder of Australia's second-largest buy now, pay later player Zip Co, haslabelled its December quarter result "absolutely cracking" andquestioned investors' reluctance to value it on similar multiples to rivalsAffirm, Afterpay, and Sezzle.

On January 14during Affirm's Nasdaq debut, investors nearly doubled its value to around $US30 billion. This lit a fire under Afterpay and Sezzle, with Zip still playing catch-up.

For the Decemberquarter, Zip reported total customer numbers virtually doubled year-on-year to5.7 million on total merchants up 73 per cent to 38,500. This growth translatedinto quarterly revenue soaring 88 per cent year-on-year to $102 million, withannualised revenue of $480 million based on December's result.

Our view would beon the revenue multiples we're significantly undervalued when directly comparedto Afterpay and obviously Affirm," Mr Grey said. "Even if you lookedat us as a direct comparison to Sezzle, we would appear undervalued, and Ithink that one of the opportunities for us as we go to market this year is tobridge that valuation gap.

“So we would behopeful of getting a re-rating at some stage, which should assist with theshare price."

The Zipco-founder said it's significantly undervalued versus peers when using salesmultiples

Afterpay shares hit a record high of $149.78on a valuation around $42.5 billion on Thursday, with gains of 334 per centover the past year. While Zip advanced 11 per cent to $6.64 (a $3.7 billionvaluation) and relatively modest 79 per cent gain over the last year.

Mr Grey has a point on the valuation gap, asover the December quarter Afterpay posted total transaction value (TTV) of $4.1billion, versus Zip's $1.6 billion and both businesses enjoy similar merchantfee margins.

Despite Afterpay's TTV being just 2.6 timesthat of Zip over the December quarter, Afterpay is 11 times more valuable.

Both Affirm and Zip offer longer loans thanAfterpay, yet Affirm's multiple is comparable to Afterpay's.

"In the Australian market certainlythere's been less appreciation potentially for the longer duration receivables.Affirm listing in the US shows that US investors actually do appreciate longerduration receivables that are delivered in a new way," argued Mr Grey.

"So Affirm would be quite a bit moresimilar to Zip in the fact it has longer instalment periods available to itsconsumers, so it's receivables don't recycle necessarily as quick as Afterpayyet they're receiving similar multiples."

If Zip were valued on a similar multiple toAfterpay's 10 times quarterly TTV (as the closest proxy to revenue) its shareprice would be $28.90 on a $16 billion valuation, versus $6.67 today on a $3.7billion valuation.

For investors in the sector, value is a whitehot potato, and Mr Grey is likely correct in suggesting investors prioritiseAfterpay as it has the shortest receivables books (only offering loans overfixed eight or ten-week periods).

The faster a company turns over itsreceivables while earning merchant fees, the higher its return on investedcapital as a measure of profitability. Similarly, businesses that offer largerand longer loans say over six months probably carry more credit risk as adebtor has more opportunity to default in six months than eight weeks.

Afterpay also often boasts the faster turnoverof receivables gives them more opportunity to adjust credit settings.

On the other hand, Zip always conducts fullercredit checks, and saw net bad debts as a percentage of TTV fall to 1.93 percent in the December quarter, versus 2.43 per cent in the prior quarter.

In turn Mr Grey is keen to emphasise that Zipis chasing growth, but not at the expense of deteriorating unit economics as italso chases profitability.

"In the US business we're delivering significantly higher uniteconomics than the competitive peer set, all be it it's a very competitive market place there, there's been no margin or fee pressure at all to date in the US," he said.

It's also worthremembering that first movers in new industries like Afterpay, rightly or not,tend to get higher valuations. Overnight Netflix set a new record high, whilestreaming challenger Disney trades on a far lower multiple. The first moveradvantage is another intangible, comparable to the lead husky, where investorsview it as the strongest until they receive evidence otherwise.