I'd say ....lots of room to keep moving up

Zip valuation frustrates boss after 'absolutely cracking' quarter

Tom RichardsonMarkets reporter and commentator

Jan 21, 2021 – 2.52pm

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Peter Gray, co-founder of Australia's second-largest buy now, pay later player Zip Co, has labelled its December quarter result "absolutely cracking" and questioned investors' reluctance to value it on similar multiples to rivals Affirm, Afterpay and Sezzle.

On January 14, during Affirm's Nasdaq debut, investors nearly doubled its value to about $US30 billion ($39 billion). This lit a fire under Afterpay and Sezzle, with Zip still playing catch-up.

Peter Gray, working from home in North Ryde. The Zip co-founder says the company is significantly undervalued versus peers when using sales multiples. Louie Douvis

For the December quarter, Zip reported that total customer numbers virtually doubled year-on-year to 5.7 million and total merchants were up 73 per cent to 38,500.

This growth translated into quarterly revenue soaring 88 per cent year-on-year to $102 million, with annualised revenue of $480 million based on December's result.

"Our view would be on the revenue multiples we're significantly undervalued when directly compared to Afterpay and obviously Affirm," Mr Gray said.

"Even if you looked at us as a direct comparison to Sezzle, we would appear undervalued, and I think that one of the opportunities for us as we go to market this year is to bridge that valuation gap.

"So we would be hopeful of getting a re-rating at some stage, which should assist with the share price."

Afterpay shares hit a record high of $149.78 on a valuation of about $42.5 billion on Thursday, with gains of 334 per cent over the past year. Zip closed up 23 per cent to $7.36 (a $4.1 billion valuation), and a relatively modest 83 per cent gain over the last year.

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

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

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

Longer instalment times

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

"So Affirm would be quite a bit more similar to Zip in the fact it has longer instalment periods available to its consumers, so its receivables don't recycle necessarily as quick as Afterpay yet they're receiving similar multiples."

If Zip were valued on a similar multiple to Afterpay's 10 times quarterly TTV (as the closest proxy to revenue) its share price would be $28.90 on a $16 billion valuation, versus $7.36 today on a $4.1 billion valuation.