ZIP (ASX) Zip boss frustrated by stock's valuation relative to Afterpay

Originally posted by PaulAllen23: ↑

Peter Grey, theco-founder of Australia's second-largest buy now, pay later player Zip Co, haslabelled its December quarter result "absolutely cracking" andquestioned investors' reluctance to value it on similar multiples to rivalsAffirm, Afterpay, and Sezzle.

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

For the Decemberquarter, Zip reported total customer numbers virtually doubled year-on-year to5.7 million on total merchants up 73 per cent to 38,500. This growth translatedinto quarterly revenue soaring 88 per cent year-on-year to $102 million, withannualised revenue of $480 million based on December's result.

Our view would beon the revenue multiples we're significantly undervalued when directly comparedto Afterpay and obviously Affirm," Mr Grey said. "Even if you lookedat us as a direct comparison to Sezzle, we would appear undervalued, and Ithink that one of the opportunities for us as we go to market this year is tobridge that valuation gap.

“So we would behopeful of getting a re-rating at some stage, which should assist with theshare price."

The Zipco-founder said it's significantly undervalued versus peers when using salesmultiples
Afterpay shares hit a record high of $149.78on a valuation around $42.5 billion on Thursday, with gains of 334 per centover the past year. While Zip advanced 11 per cent to $6.64 (a $3.7 billionvaluation) and relatively modest 79 per cent gain over the last year.

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

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

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

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

"So Affirm would be quite a bit moresimilar to Zip in the fact it has longer instalment periods available to itsconsumers, so it's receivables don't recycle necessarily as quick as Afterpayyet they're receiving similar multiples."

If Zip were valued on a similar multiple toAfterpay's 10 times quarterly TTV (as the closest proxy to revenue) its shareprice would be $28.90 on a $16 billion valuation, versus $6.67 today on a $3.7billion valuation.

For investors in the sector, value is a whitehot potato, and Mr Grey is likely correct in suggesting investors prioritiseAfterpay as it has the shortest receivables books (only offering loans overfixed eight or ten-week periods).

The faster a company turns over itsreceivables while earning merchant fees, the higher its return on investedcapital as a measure of profitability. Similarly, businesses that offer largerand longer loans say over six months probably carry more credit risk as adebtor has more opportunity to default in six months than eight weeks.

Afterpay also often boasts the faster turnoverof receivables gives them more opportunity to adjust credit settings.

On the other hand, Zip always conducts fullercredit checks, and saw net bad debts as a percentage of TTV fall to 1.93 percent in the December quarter, versus 2.43 per cent in the prior quarter.

In turn Mr Grey is keen to emphasise that Zipis chasing growth, but not at the expense of deteriorating unit economics as italso chases profitability.
"In the US business we're delivering significantly higher uniteconomics than the competitive peer set, all be it it's a very competitive market place there, there's been no margin or fee pressure at all to date in the US," he said.

It's also worthremembering that first movers in new industries like Afterpay, rightly or not,tend to get higher valuations. Overnight Netflix set a new record high, whilestreaming challenger Disney trades on a far lower multiple. The first moveradvantage is another intangible, comparable to the lead husky, where investorsview it as the strongest until they receive evidence otherwise.

Expand

I think anotherissue continuing to drive the ZIP valuation gap vs peers is the market is yetto appreciate the Quadpay acquisition earnings. You can see by the valuationmultiples being quoted in the press yesterday it continues to exclude Quadpays.

The AFR referredto ZIP having a 34x revenue multiple. Although this is still way lower than Zip’speers, the real actual current multiple is even far lower than this.

For example:
- Theway the 34x is derived per this current article using simple round numbers isbased on the FY19 actuals for ANZ only, so 4bn market cap + $1bn debt = $5bn EV/ FY19 ANZ revenue ~$150m = 34x. So clearly the earnings are excluding QuadPay,yet incorrectly the additional dilution of shares for acquisition are included beingthe 4bn market cap / 550m shares = ~$7.30 current share price. This is clearly incorrectas in valuation we should be looking at forward earnings as we are not tryingto value or going to get rewarded for yesterday

- Inmy view, the real adjusted multiple is more like a 12x, which includes both ANZ + USArevenue, so 4bn market cap + $1bn debt = $5bn EV / Q2 FY21 ANZ + US revenue annualised(~$100 x 4 qtrs) ~$400m = 12x.

So, on a comparablepeer’s basis, ZIP is being undervalued not only just on a multiple basis but alsothe revenue they continue to apply the multiple to. Being conservative onpotential ZIP’s FY21 actual revenue is $400m and applying a broad range of 40 – 80x peer multiplesper this AFR article for APT and Affirm, that gives ZIP are rough market cap todayof $16b – $30bn, or a current today share price of $30 - $60 a share...

AFR Article
https://www.copyright link/chanticleer/doubts-about-cba-s-2b-klarna-bonanza-20210128-p56xfg

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Last $3.38		Change 0.125(3.85%)		Mkt cap ! $4.243B

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Zip boss frustrated by stock's valuation relative to Afterpay, page-88

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