No problem at all
@nakervirus, it's been a pleasure. I believe it's really important to consider other perspectives and you have clearly put a lot of thought into the merits of Zip as an investment. Therefore, I would also like to sincerely thank you for sharing these insights.
Regarding my perspective on the fair value for Zip:
- I am a very harsh critic of financial companies (as you may have already gathered). This is because significant issues can arise very quickly and catch you by surprise as an investor in them (outlined in more detail in my earlier post).
- When significant balance sheet leverage is present, I rarely believe any financial company is worth much more than their net tangible asset (NTA) backing per share. This is because I see the risk of losing significant tangible asset value as very high in an economic downturn with rising unemployment.
- At current prices you arepaying ~8x Zip's NTA/share ($2.22 vs. ~$0.27 NTA).
- I believe that ~2-3x NTA/share would be a more reasonable price to pay. Some credit is still being given here for Zip's significant US growth prospects, bearing in mind that 1x NTA/share is my rule of thumb for most financial/lending companies (remember I'm a very harsh critic).
- It is worth noting that if your assessment of the situation is proven correct, then my fair value assessment will not be high enough. The reason I am cautious in my valuation for Zip is because the upside scenario you have outlined so well, is not a 100% certain outcome. I think it's reasonable to also consider a possible downside scenario (where things don't go quite to plan) and then weight the two scenarios together to reach a 'middle-ground' fair value so to speak.
- My assessment of the fair value will change over time as the situation unfolds. For example, if Zip has further positive business developments, over time I will adjust my fair value upwards to incorporate these (and vice versa).
"Regarding the economic downturn, Zip has just endured a terrible macroeconomic environmnent for the past few years - and come out the other end stronger than ever."I have a different perspective on this issue. I believe Zip may have actually benefitted from very low levels of unemployment across the past few years (notwithstanding the challenges associated with elevated inflation). This is because it has been easier than usual for many people to obtain and retain employment. Therefore, they have had a greater ability to both borrow money and then pay it back. What concerns me is a possible scenario where some of these jobs are lost, as the central banks have been actively trying to achieve higher levels of unemployment by raising rates (reducing demand relative to supply in the economy). Lowering of interest rates would then reflect the fact that they have successfully taken the excessive demand out of the economy (i.e. some of Zip's users may have ultimately lost their job).
I am not forecasting an 'imminent economic downturn', however, any rise in unemployment would have a negative impact on Zip. The severity of this impact would be dependent on the magnitude of the loss of employment (this is way out of my pay grade to attempt to predict). Zip's lending criteria would need to tighten in response to this scenario, resulting in a lower US growth rate.
You make a good case for viewing the higher bad debts as a customer acquisition cost (i.e. weeding out the customers that don't repay and sticking with the ones that do). One question I would ask though, is why have the active customers not grown faster than ~6% while the lending/TTV has grown by ~40%? This suggests that the majority of the US growth (>30%) has come from lending more to existing customers rather than acquiring new ones.
Another potential risk for Zip is they could start to lose some of their highest quality customers who repay on time. These customers may realise they can get essentially the same 'pay-in-4' product without the added interest cost Zip charges them (~30% rate per annum). I believe Affirm, Afterpay, and PayPal all offer interest free 'pay-in-4' products.
(20min delay)