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Down 40%, is the Zip (ASX:Z1P) share price too good to ignore?

Could the Zip Co Ltd (ASX: Z1P) share price be too cheap to ignore with it falling 40% since the middle of February 2021?

The buy now, pay later business has seen some of the hype taken out of its valuation. Some BNPL operators have actually seen a recovery in recent weeks. The Afterpay Ltd (ASX: APT) share price has risen more than 20% since the start of the month. The Sezzle Inc (ASX: SZL) share price is up 17.5% since 30 March 2021.

Zip shares are only up 12.5% since the start of the month. So Zip isn’t getting the same investor attention as it did before. However, don’t become too focused on where a share price has been. Just think about its valuation today.

What has Zip announced recently?

The most recent announcement was the buy now, pay later partnership with JB Hi-Fi Limited (ASX: JBH). Zip will be providing BNPL for both in-store and online for JB Hi-Fi and The Good Guys stores. That wasn’t a significant announcement though.

The HY21 result showed a lot of growth of its business and top line. Zip achieved record transaction volume (TTV) of $2.3 billion, up 141% year on year – annualising at $7.5 billion at December 2020. Revenue increased 130% to $160 million, annualising at more than $480 million at December 2020.

Zip delivered positive cash EBTDA (EBITDA, except it’s earnings including the interest) in the first half, with cash gross profit margins improving to 54%. Positive earnings is good for the Zip share price. The loan book received 42% growth to $1.7 billion.

The BNPL business said that the addition of Quadpay delivered a step change in unit economics, revenue yield and capital efficiency for the company – revenue as a percentage of TTV was 6.89% and the gross margin of TTV was 3.71%. The ‘blended’ book is now recycling every three months on average.

Active customers rose 217% to 5.7 million and merchant numbers increased to 38,500.

Is the Zip share price a really good opportunity?

Using the market capitalisation on the ASX, it’s currently worth $4.58 billion. Compared to its annualised revenue of more than $480 million, that’s less than 10 times. Now, 10 times revenue is quite a high valuation for most businesses. But compared to others in the sector, particularly Afterpay, I think Zip looks a little bit more reasonable. I’d prefer to buy Zip over Afterpay.

But Zip has a high valuation when compared to other ASX growth shares that are already generating lots of profit. The thing is, investors seem to be pricing in that buy now, pay later operators can keep earning the high merchant margins they do. But there is big competition entering the BNPL space like Commonwealth Bank of Australia (ASX: CBA) and Paypal Holdings Inc (NASDAQ: PYPL). This could pressure on the margins in the future.

I’m not expecting the Zip share price to get back to $14 any time soon, particularly if interest rates are going higher.

You can read this for the Zip FY21 third quarter update.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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