On Monday it was announced buy-now-pay-later (BNPL) leader Afterpay Ltd (ASX: APT) would be acquired by global payments giant Square Inc (NASDAQ: SQ).
The deal values Afterpay shares at around $126 or a market capitalisation of $39 billion.
With the number one BNPL set to be taken off the ASX boards, where does this leave number two Zip Co Ltd (ASX: Z1P)?
Z1P share price
If Afterpay is worth $39 billion, then Zip is worth…
The market clearly reacted favourably to Afterpay’s takeover, sending Zip shares up 9.04% today to $7.24.
The Afterpay deal valued the company at roughly 42x sales or 1.74x total transaction value (TTV).
Using these multiples as a yardstick for the value of Zip shares, we can arrive at an indicative share price for the business.
Zip recorded approximately $404 million in revenue and TTV of $5.7 billion in FY21.
This would value the company at around $17 billion (a share price of $31) based on revenue and $10 billion (a share price of $18) based on TTV.
With the current price of $7.24, this makes Zip shares look underpriced.
However, this is by no means a thorough valuation – it gives a rough ballpark estimate. Both Zip and Afterpay have decent unit economics and product offerings but readers should also note Afterpay has and continues to reap significant benefits from its first-mover advantage.
Possibly it says more about the crazy price Square paid rather than the value of Zip shares. Not a lot has to go wrong for the Afterpay acquisition to be a stinker.
Validation of the sector
It seems each month a new BNPL hits the market.
Humm Group Ltd (ASX: HUM), Sezzle Inc (ASX: SZL), Splitit Ltd (ASX: SPT) and Openpay Group Ltd (ASX: OPY) come to mind.
That is before we even consider the international behemoths including Swedish fintech Klarna and Affirm Holdings Inc (NASDAQ: AFRM).
Did I mention Apple Inc. (NASDAQ: AAPL) and Paypal Holdings Inc (NASDAQ: PYPL) have set up their own BNPL offering?
With all this competition, you’d think BNPL valuation would start sinking instead of soaring.
However, the emergence of new players validates the enormous market opportunity.
“Zip believes this is a huge positive for the BNPL sector at large, and further validates that BNPL is a massive global opportunity that continues to grow and win preference with consumers and merchants” – Zip spokesperson Matthew Abbott
Afterpay gone, Zip next?
In July it was reported Swedish based Klarna bought a 4% stake in Zip, worth an estimated $160 million. Cleverly (or conveniently), this remains below the 5% ownership threshold of declaring to the market the company is a substantial shareholder.
As a result, one can’t be sure if it was Klarna who built the 4% stake.
However, it would make strategic sense. Klarna is in an arms race with Affirm and Afterpay for market share in the United States. Zip’s Quadpay acquisition provided the company with exposure to the US.
Klarna may look to consolidate its market position by purchasing Zip outright.
Final thoughts
Square’s acquisition of Afterpay validates the BNPL market and its future role in the payments ecosystem.
It remains to be seen if a bid will follow for Zip. If one does eventuate, I expect it will be at a premium to the current price based on the multiple paid for Afterpay.
I suspect this won’t be the last we hear of consolidation in the BNPL sector.
If you want to find out more about BNPL, my colleague, Cathryn Goh published this free industry report.
