Shares in buy-now-pay-later (BNPL) Zip Co Ltd (ASX: Z1P) have been trading relatively flat despite recently providing the market with further details into its European and Middle Eastern expansion plan.
Zip’s shares are up just shy of 100% over the past 12 months, but still down 51% after reaching their lofty highs earlier this year.
Z1P share price
Expansion continues
Monday’s announcement struggled to budge Zip’s share price, but this is likely because the expansion was actually previously revealed following a $150 million capital raising in December last year.
So, these growth opportunities were likely already priced into its current valuation, but the recent announcement did provide some further details and reveal that Zip will acquire the remaining shares in both Twisto and Spotii.
Twisto acquisition
Twisto is a payments provider based in the Czech Republic that also has a presence in Poland. Since being founded in 2013, the platform has attracted over 1 million customers and 14,000 merchants.
It generates around $230 million in total transaction value (TTV), which translates to an annual run rate of $12 million in revenue.
Zip will purchase the remaining shares in Twisto for a hefty sum of $140 million. While the price tag doesn’t appear to come cheap, it’s worth noting that Twisto holds a European Institution Payment Licence, essentially allowing it to provide payment services to other EU member states subject to regulatory consents.
The rationale behind expanding into central and eastern Europe appears to make sense here. Interestingly, the Czech Republic and Poland have some of the highest penetration of contactless payments globally, but the BNPL sector has seen relatively slow adoption compared to other areas.
Twisto seems to have the first-mover advantage in its current geographies and there doesn’t seem to be any presence of larger competitors such as Klarna or Afterpay Ltd (ASX: APT). There is one fairly large rival, Revolut – but it seems it’s more focused on foreign exchange (FX) and deposit accounts rather than a BNPL offering.
Twisto plans to expand further east into Romania but has ruled out other larger markets such as Germany and the UK as these are already heavily saturated by Klarna.
Spotii
Zip’s second acquisition was Spotii – a BNPL provider that currently has operations in the United Arab Emirates and Saudi Arabia, both of which are supposedly high growth areas with online spending increasing at 25% per year.
Founded last year, Spotii is a fairly new entrant in the space with 650 merchants and 40,000 customers on its platform.
Zip didn’t provide any information into Spotii’s metrics such as revenue or TTV, but considering the business has an implied enterprise value (EV) of around $26 million, I imagine its contribution wouldn’t be too significant at this stage.
I can also understand the rationale behind Zip’s expansion into the Middle East. Part of the reason why BNPL is such a booming industry in these markets is because traditional credit products that involve interest are prohibited under Sharia Law.
Given the interest-free nature of many BNPL products, this could be a large opportunity for Spotti, but it may be a double-edged sword as well. Interestingly, its largest competitor in the region – Tamara Solutions, promises to donate all of its late fees to an approved charity to remain Sharia-compliant.
So, while there’s likely an untapped market in the Middle East, it’s worth noting that there are already some formidable competitors and there’s the added challenge of remaining compliant with local regulations.
Summary
I think Zip’s expansion into relatively untapped markets appears to make logical sense, as opposed to trying to compete where there’s already heavy competition.
Twisto’s planned expansion into Romania struck me as an interesting choice. Out of all the countries in the world, Romania is the most reliant on cash, with over 70% of payments made in this payment method.
Nearly half (42%) of the population don’t have a bank account, so I think it’ll be interesting to see if people’s habits change over time and what effect this will have on digital payments.
For the moment, Zip is a growth story I’m happy to sit on the sidelines for now. To me, its slightly demanding valuation seems to imply a certain blue sky scenario where these new growth opportunities seem to be fairly priced in already.
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