The Zip Co Ltd (ASX: Z1P) share price has fallen 40% since 16 February 2021, does this mean it’s now really cheap and a big opportunity?
Zip share price carnage
Zip shares have declined by around 40% in less than a month. That’s a pretty devastating drop over such a short period of time.
But it’s not all bad if you’ve been shareholder for longer than a month, in-fact the Zip share price has gone up 15.7% since the end of January 2021. So it actually rocketed up to the middle of February but has since dropped back hard. It has followed the heavy decline of the Afterpay Ltd (ASX: APT) share price. Even after the decline, Zip still has a market cap of $4.66 billion. The market still has high expectations for Zip in the future.
What was reported recently?
Zip and its acquired business called Quadpay have seen strong levels of growth. The buy now, pay later (BNPL) business has seen a lot of success with Quadpay since it completed the acquisition in August 2020, with total transaction value (TTV) growth of more than 140% in the four months since completion.
Overall, Zip saw transaction volume growth of 141% to $2.3 billion. Management believe the company now has annualised TTV of more than $7.5 billion. It also achieved revenue growth of 130% to $160 million. Revenue is now annualising at more than $480 million.
Perhaps the most important statistic was that Zip achieved positive cash EBTDA (that’s EBITDA but includes interest). The cash gross profit margin improved to 54%. Zip said it’s demonstrating market leading unit economics whilst investing for global growth.
The loan book increased by 42% to $1.7 billion. The number of active customers grew 217% year on year to 5.7 million.
My thoughts on Zip and the share price
As a BNPL company, Zip is doing the right things to grow its customers, TTV and revenue. However, I think a key question is – what share price is appropriate for a business but is not making any profit (yet)? It’s hard to say, there is a lot of hype and expectation surrounding Zip and other BNPL companies. Profit margins could fall in the future if players like PayPal win market share with its cheaper instalment offering.
The Zip share price falling doesn’t necessarily make it cheap, though it is obviously better value than before. Rising interest rates (and expectations) could hurt both the Zip earnings over the longer term and the Zip share price in the shorter term. I’m holding off buying shares.
