An impressive trading update from Zip Co Limited (ASX: Z1P) saw its share price finish the day nearly 17% higher, which now means Zip’s valuation has climbed nearly 35% since the start of the month.
Zip’s current valuation is still around 33% lower after its most recent rally which saw its share price reach around $14.50 during February.
Z1P share price
Strong Q3 update
While the last rally in February was largely sentiment-driven, yesterday’s catalyst was the announcement of the company’s Q3 results for the period ending 31 March, which you can read about in detail here.
Yesterday’s update confirmed Zip’s upwards trajectory in both domestic and international markets.
Zip US (Quadpay) was a highlight of the recent results, which reported year on year (YoY) transaction growth of 234% and revenue growth of 188% across the quarter with 647k new customers added to the platform.
Growth back home in its domestic segment has also continued, with ANZ transaction volume up 61% to $837.3 million and quarterly revenue up 37% YoY to $57.9 million.
Is there more room to grow?
A common metric often used by investors is a company’s Total Addressable Market (TAM), which essentially gives an idea of the total amount of sales able to be achieved if the company were to reach 100% market share.
Zip CEO Larry Diamond has mentioned Zip operates in an estimated TAM of around $22 trillion and that buy-now-pay-later (BNPL) only has around 1.6% penetration in global e-commerce spending.
It’s probably unlikely Zip will achieve 100% market share considering the fierce competition from other larger players such as Afterpay Ltd
(ASX: APT) and US-based Affirm Holdings Inc (NASDAQ: AFRM).
Still, Zip’s Serviceable Obtainable Market, which accounts for competition is still likely much larger than its current revenue-generating capacity. From this perspective, there’s likely to be more upside in underlying fundamentals as consumers continue to move away from traditional credit products and further adopt BNPL payment methods.
Time to buy Zip shares?
While analysing a company’s addressable market can be useful, I think it’s just one way to gauge the potential opportunity. It’s also worth considering how much of this further growth runway has already been priced into Zip’s shares today.
Valuing Zip’s shares can be difficult, especially when using traditional valuation methods such as a discounted cash flow (DCF) model due to the sensitivity and estimates involved with predicting growth rates and cost assumptions.
Another way to tackle the valuation is by assuming today’s valuation is fair and working backwards to arrive at implied revenue and profit levels needed to justify the valuation. For an example of how this can be applied to Zip’s shares, click here to read: 1 easy way I value Zip (ASX: Z1P) shares: are they dirt cheap?
