Sezzle has 2 times Zip MC, page-55

Structural secular growth levers for Zip

Zip Co ((ZIP)) has caught the attention of Goldman Sachs, with the broker initiating coverage of the stock with a Buy rating and $2.50 target price.

Acknowledging the transformation the buy-now-pay-later (BNPL) service provider has undergone, with strategic focus on top-line growth and sustainable earnings, Zip is today considered to be operating from a strong position.

The company repaid the balance of its corporate debt, including via an equity raise in July 2024, which de-risked and simplified the balance sheet. A $50m buyback was also announced on April 23.

The analyst proposes three growth levers for the company, based on the assumption the US economy will be supported by unemployment remaining subdued and credit risk being manageable.

Following on international trends, an ongoing secular switch to more transparent and innovative credit products is expected; ongoing growth on buy-now-pay-later adoption across growth in e-commerce.

Some 16% growth in the US BNPL segment is forecast on a compound annual rate, according to industry estimates; and the leveraging of partner networks to enhance and increase acceptance of BNPL as a greater share of wallet size.

In A&NZ, Goldman Sachs emphasises Zip retains a market-leading position with a robust user cohort. There is an expectation higher-margin products can be adopted against a better fund cost backdrop with falling interest rates.

Over the longer term, the US is anticipated to be the growth lever for the company and primary earnings generator. The analyst forecasts compound average growth rate per annum for US cash earnings (EBTDA) of 20% from FY25 to FY28, compared to 10% for the A&NZ region.

The forecasts are in the medium-term range guidance from management and do not incorporate a recessionary environment across geographies.

Those earnings forecasts do remain sensitive to a recession outlook or negative economic backdrop.

Target price is set at $2.50 with a Buy rating. FNArena daily monitored brokers have a consensus target price of $3.067 with three Buy ratings.