The Zip Co Ltd (ASX: Z1P) share price has dropped 36% over the last four months. Does that mean it’s now undervalued?
Zip’s rough treatment in the final months of FY21
Despite the business reporting continuing strong growth recently, the company has suffered this significant selloff.
The decline started in reporting season in February 2021. The buy now, pay later company said in HY21 it generated record transaction volume (TTV) of $2.32 billion, up 141% compared to the prior corresponding period.
Zip said that its TTV was annualising at more than $7.5 billion as at December 2020.
This helped the company generate record revenue of $160 million, up 130% compared to the prior corresponding period, which was annualising at $480 million at December 2020.
Zip said that its cash gross profit margin improved to 54% in the half – demonstrating market leading unit economics whilst investing for global growth, according to management. This helped the business deliver positive cash EBTDA in the period.
The business said that the loan book (receivables) increased by 42% year on year to $4.7 billion.
Its FY21 third quarter update showed continuing growth. Quarterly transaction volume was $1.6 billion, up 114% year on year. It also saw 80% growth of its quarterly revenue to $114.4 million.
Those numbers were driven by record transaction numbers, with an increase of 195% to 12.4 million.
Customer numbers and merchants continued growing quickly. Customers increased by 88% to 6.4 million, whilst merchants on the platform went up 81% to 45,300.
Zip US, meaning Quadpay, was the strongest performer. Zip US saw transaction growth of 234% to $762 million, 188% growth of revenue to $54.4 million and customers increased 153% to 3.8 million.
Can acquisitions boost the Zip share price?
A few weeks ago the company announced some acquisitions. It’s going to buy the rest of European BNPL business Twisto Payments and Zip will also acquire the rest of UAE-based BNPL company Spotii. The company believes that both Twisto and Spotii can leverage the benefits of being part of a global payments organisation. One of the most useful things about the Twisto acquisition is that its license can be passported to all 27 member states of the EU.
Summary thoughts about Zip and the share price
The Zip share price has fallen a long way. But it’s tricky to say at what price it’s good value. The profit margins of the BNPL sector is hard to judge over the longer-term. What if all of the BNPL companies reduce their prices to keep/gain market share in the future? Or what if the regulator steps in?
If we had clarity about the future margin (which you’d need a crystal ball for) then it would just be a simple matter of time before Zip is profitable as it grows in size. There’s a big potential market out there, but there’s plenty of competition too like Afterpay Ltd (ASX: APT) and Klarna.
I like the ASX growth shares that are already profitable – or have a clear plan on how to generate profit in the next few years.