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Macquarie remains bearish on Zip Co.

William McInnes

Macquarie is remaining bearish on Zip Co., saying it sees downside risks for the company’s margins.

The broker held its underperform rating on the stock and while it increased its price target from $5.35 to $5.70, its valuation is just over half its current trading price.

“We see downside risks to Quadpay’s revenue to TTV margins and expect customer acquisition costs to remain elevated to support ongoing customer growth,” Macquarie’s analysts said.

“Risks to our thesis are from the market only focussing on customer growth and sector multiples remaining elevated. We disagree with applying an EV/Sales multiple for Zip due to the average duration of receivables in the Zip ANZ business.”

The broker noted Zip’s cash operating costs were rising ahead of revenue growth, with a big increase in the company’s dollar per customer.

“Given the size of the prize in the US we anticipate marketing spend to continue to trend up, however it appears much of the recent uptick was directed towards the ANZ business,” the analysts said.

“Subsequent segment disclose will allow us to assess whether Zip is getting an appropriate return on each dollar invested to acquire new customers.”