The Zip Co Ltd (ASX: Z1P) share price has fallen by around 35% over the last six months. Should investors look at it as an opportunity?
What has happened?
It has been a difficult time for Zip shareholders, despite the business reporting lots of growth.
Reporting season is over and we got a good look at how Zip has been performing.
The buy now, pay later business reported that it grew revenue in the FY21 result by 150% to $403.2 million. It was helped by a 176% increase of transaction volume to $5.8 billion and 293% growth of transaction numbers to 41.3 million.
The US saw revenue of $176 million (pro forma growth of 269%) from transaction volume of $2.45 billion.
Zip generated cash EBTDA (earnings before tax, depreciation and amortisation) for FY21 of $22.9 million.
Whilst the revenue numbers were good, the statutory loss after tax was a loss of $653 million, though $306 million of that related to a net adjustment for the acquisition of Quadpay/Zip US.
Is the Zip share price actually an opportunity?
When a business falls 35% and it’s growing revenue at more than 150% per year, it’s definitely worth thinking about.
Zip is now operating in 12 markets across five continents with the additions of places like Canada and Mexico. There have also been regional market entries in Europe, the Middle East and Southeast Asia.
There’s a huge global addressable market for Zip to target. The more transaction volume it processes, the more valuable it becomes, as long as its margins (and losses) remain healthy.
It’s surprising that the market is going colder on Zip considering the huge deal where Square Inc (NYSE: SQ) is buying Afterpay Ltd (ASX: APT). Whilst it’s not as though there’s a Triangle Inc also looking to buy a BNPL business, the deal should give some credit to Zip considering how much volume it processes ($5.8 billion in FY21) compared to Afterpay ($21.1 billion).
However, I’m not sure about the future profitability of the buy now, pay later sector considering big players like PayPal and Commonwealth Bank of Australia (ASX: CBA) are entering the space.
