As a whole, the Buy Now, Pay Later (BNPL) industry has copped an unwavering amount of scrutiny. I remember when APT was at their IPO stage and the Australian Financial Review (AFR) shredded them in just about every possible article and way they could (very different to the positive articles you see plastered about APT on the AFR now), they then suffered through regulatory shutdown threats **cough banks** as the whole banking industry was shook and disrupted with such a simple idea whose time had finally come. Throughout all of this scrutiny, I was wholeheartedly confident that APT would eventually get to at least $60.00 a share in the next few years, and it has far exceeded those expectations.
Yes, by the way, I realise this article is about Zip, not APT, bare with me we are getting there.
Here's why I believed the BNPL industry would prosper (At the beginning of it all). Pre-covid, retailers were already suffering, let's face it, online shopping had just about decimated the physicality of shopping and even retailers with a shop front who also had an online presence still suffered from crippling rental prices and a decrease in foot traffic and then Covid happened... Boom. Desperate for a simple solution to stimulate spending, the BNPL industry was a welcomed relief. Yes, by the way, I'm well aware that credit cards still existed, however, they are entirely different to the BNPL products and both are aimed at different consumers; so we won't even bother comparing them. It wasn't only retailers who were relieved with the boost in spending and the economy, so was the government. I figured there was no way, the government would shut-down or a product/industry that was helping boost the economy and business; if they did that would create anarchy amongst retailers and consumers alike. AfterPay quickly took off, and lagging was, yep you guessed it Zip. Zip has made a name for itself as a highly volatile stock, whereas APT has experienced fairly smooth sailing (aside from the covid crash) and cracked the $100 mark recently.
The volatility of Zip have left a lot of investors (and their portfolios) reeling, rocket emojis that were once a common sight with Zip posts on ASX chat groups have diminished, many have been left many questioning what's wrong with Zip, and the hope that it will catch up to its predecessor is fading.
Zip is to put it simply, frustrating for investors and I'm sure the board themselves. It has finicky patterns, one reoccurring pattern is 'buy the hype, sell the news'. Zip has a tendency to cliff-dive on great news, why? Well, some might say it was already 'priced-in' and potentially the first couple of times it dived on the release of news, it was. However I don't believe that is the case at present, I believe it drops on good news now due to the habit of investors, e.g. the stock price has dropped a few times now on the release of news so investors now expect it to drop on news day, so they panic sell and swing traders capitalise on the price movement. It's just become a thing.
Zip HQ: 'Let's put out this great news, it's sure to rise this time round'
ASX: Releases the great news
Zip Investors: 'Initiate panic sell'
Zip Stock: Cliff-dive initiated
Let's weigh up the pro's and con's of this stock, and if there any long-term hope for Zip?
Substantial increase in competition - 'If the ducks quack, you feed them': Due to consumer demand and the success of AfterPay the BNPL industry has boomed, this boom has created copious amounts of competition [Visa, Sezzle, Splitit, Latitude, OpenPay, Klarna, Affirm, Humm], banks and even PayPal have jumped in on the action. The BNPL industry has also evolved and instead of relying on the 'merchant as a subscriber relationship', some BNPL companies now offer debit style cards; meaning the consumer can spend their accounts anywhere e.g 'Tap & Zip' from Zip.
Westpac ceased as a substantial holder of Zip:
Westpac announced a deal with Zip's rival AfterPay and then essentially dumped their 10.7 per cent stake in Zip the day after the announcement. This confirmed shareholder uncertainty and the stock has struggled to recover, even after releasing their recent positive Quarterly update and the new 'Tap & Zip' product.
Rising bad debts: Zip with 2.1M customers, increased its full-year net loss and higher bad debt expenses to 2.24 per cent (0.61 per cent increase) and a total of $27.8 million was written off. Afterpay with 9.9M customers reported a net loss totalling $20.6 million, up from $11.1 million for the previous financial year.Stock market manipulation: 'The powers at be' have been riding the Zip wave, attributing to the price and volume fluctuations and capitalising on the movement.
Positives: Revenue has essentially doubled: Zip announced revenue of 161M (increase of 91%)(FY19 $84.2M), and customers also increased to 2.1M (FY19 1.3M). To put it into perspective, AfterPay reported a 97 per cent increase in revenue (year ending June 30, 2020), from $264.1 million last year to $519.2 million this year.Zip is an innovative company: Zip has proved they are innovative, releasing Zip & Tap as well as ZipMoney. I personally believe they have a team that is driven to meet the demands of their consumers, merchants and competition. Zip also became a principal issuer with Visa and signed a strategic agreement with Marqeta to further innovate around the payments experience. They completed the acquisition of US BNPL QuadPay, providing immediate access to the $5t US retail market. Issued $100m in Convertible Notes and $100m in Warrants to Susquehanna Investment Group to accelerate global growth.Zip invests in their marketing, team and brand awareness: Coming from a marketing background, I highly value a company that invests in their marketing strategy, brand awareness and lead generation.
Zip is undervalued: According to 8 analysis Zip is expected to reach its mean price of $8.18, or its reach target of $11.50 in 12 months. From my personal perspective based on my own research and understanding of eCommerce, business and consumer phycology, I believe the stock should already be priced at a minimum of $14.00, however, unfortunately, the speed-bumps I mentioned earlier have hindered its price target progress.
So, where does this all leave Zip? Zip will need to keep proving they are on track for accelerated growth in subscribers and revenue. They have also demonstrated that they have increasing bad debt in comparison; their ability to minimise bad debt and debt write-offs will assist in cementing investor certainty.
My personal opinion:To put it simply, I believe Zip has the team, expertise and funding behind it to achieve growth and will refine procedures to help mitigate the issue of rising debts. I expect to see Zip recover from recent challenges in the short to medium-term future.
Ciao.
FYI: This is a completely unbiased opinion based on publicly available information and although it would be nice to actually get paid for my writing, I don't get paid to write anything and have no affiliate with the companies mentioned in this article. At the time of publishing this article I do not hold any Zip stock.
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