Brokers sense interest as Australia’s favourite meme stock returns

In the AFR today from across the Ditch

The list of names dumped from the ASX 200 alongside Zip shows how rare a comeback is. But while its business is firing, not everything has changed.

Ring the bell, Australia’s favourite meme stock Zip Co is back. Not long ago online the most heavily traded name among brokers, Zip looked down and on the way out. Its access to cheap equity and debt had dried up, and it was pulling out of ambitious expansion plans to refocus on Australia, New Zealand and the United States.

Cynthia Scott went from running Barclays in Australia to executive positions at Telstra, Scentre Group and now Zip Co. Kate Geraghty

That’s when former Barclays Australia head of investment banking and chief executive Cynthia Scott had taken charge of its operations and strategy.

Now it is on the up again. The turnaround is on track – $70 million core cash earnings in FY24, up from $48.2 million in losses last year and $151.4 million in losses for FY22 – its loan book is flying, the share price is rocketing and Zip is up to its old tricks: capitalising with a chunky capital markets deal.

The US is the growth engine (as it was), the Australia and New Zealand business is looking more mature (as it was), but this time Zip and its new brigade promise a leaner, meaner, more profitable growth to create longer-lasting value for shareholders. Analysts expect it to break even in the coming years (normalised earnings per share, per S&P Capital IQ estimates), having not recorded a profit until the first half of FY24.

Related Quotes

ZIPZip Co

$1.605

1.90%

1year1day

Jul 23Oct 23Jan 24Jul 240.0000.5001.0001.5002.000

Updated: Jul 18, 2024 –8.48am. Data is 20 mins delayed.

View ZIPrelated articles

Advertisement

The reborn Zip pitch is catching on. The share price has just about quadrupled in the past year, from 43¢ to $1.60, taking its market capitalisation back above $1.5 billion and, remarkably, putting it on track to rejoin the benchmark S&P/ASX200 next week.

Such a frenzy creates options and, with index inclusion just around the corner, Zip has cemented its comeback with a surprise $217 million placement of new shares on Wednesday morning. Thefunds raised were to repay expensive debt put in place when the company had farfewer options.

The deal was at a minimum $1.52 a share, or as little as a 5.3 per cent discount to the last close, and would be followed by another $50 million share purchase plan to existing investors.

“No words,” was one small-cap fund manager’s response on seeing the deal. Another said Scott had “done a really good job”. A third: “What the ...?”

Index aware

Will it work? Who knows? But you can bet trading volume will surge again, led by Zip’s still-there retail fan base who made it Australia’s No. 1 meme stock earlier this decade.

The fact that it will re-enter the ASX 200 means institutional investors will have to make a conscious decision to ignore it, knowing that it could be costly to do so – it was the same a few years ago when the stock raced above $12.

Trading activity has already stepped up before the index inclusion – 23 million shares (2 per cent of issued equity) traded daily so far this month versus 17 million on average over the past year.

Brokers can sense the interest; you could tell this from Wednesday morning’s call. Big and small institutional shops queued to ask Scott questions – Citi, UBS, RBC Capital Markets, E&P Capital and Ord Minnett among them. These analysts don’t turn up where there is no interest. Goldman Sachs and newcomer UCP underwrote the raising.

Their questions homed in on Zip’s US growth, which is still the sizzle in the Zip story.

Zip is the second-largest buy now, pay later provider in Australia and New Zealand, but the US is a much larger market (and a faster-growing one for Zip). It became Zip’s biggest revenue contributor in the six months to December, and was 20 per cent bigger than Australia and New Zealand in the June quarter.

The Australian business is relatively mature, by comparison.

Revenue in the Americas was up 46.8 per cent in the June quarter compared with the same time last year, and transaction volume was up 42.6 per cent. Interestingly, active customer numbers rose only 1.4 per cent, which shows Zip is getting more out of every customer rather than adding swathes of new shoppers.

Wednesday’s raising, backed up by those fourth-quarter results, feels like we’re being asked to board the Zip rollercoaster all over again. Scott’s the conductor this time around, taking over from co-founders Peter Gray (still running the company in Australia and New Zealand) and Larry Diamond in August last year.

Zip co-founders Peter Gray and Larry Diamond. The different product and customer mix wasn’t supposed to include an equity raising. DominicLorrimer

Key thematicunchanged

The reality is Zip’s comeback has been brewing for a while, ascovered by senior banking writer James Eyers in March. However, it can take a chunky equity raising and external validation, such as ASX 200 inclusion, to wake the rest of us up to it. Many fund managers had consigned it to the meme stock dustbin, only to now have to go back there.

The key thematic, as E&P analyst Julian Mulcahy put it in a note on July 2, is unchanged: “Millennials and Gen Z don’t like banks.” Mulcahy thought its new growth strategy and product mix shift was “a new beginning, which we believe warrants a revisit by investors”.

That new beginning, with a different product and customer mix, wasn’t supposed to include an equity raising. This is Zip, however – a heavy capital raiser over the years. Growing a loan book requires capital.

To Zip’s credit, coming back from such a capital market dumping is rare.

It was spat out of the ASX 200 in the September 2022 quarterly review alongside Life360, AVZ Minerals, City Chic, Clinuvel Pharmaceuticals, EML Payments, Janus Henderson and Pointsbet. The other names on that list show just how hard it is to win back market support. Only Life360 (now with a $3.7 billion market capitalisation) has bounced back better; Janus Henderson and AVZ delisted.

The rest of them are worth about as much as Zip, combined.

Zip’s back – Wednesday’s raising confirms it. Now it needs to make it work for those investors paying $1.52 a share to get back on the rollercoaster.