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Are Zip (ASX:Z1P) shares a buy? Some pros and cons from Motley Fool analyst Kate Lee

Will the Zip share price beat the market over the long term? Here’s what one analyst thinks.
The post Are Zip (ASX:Z1P) shares a buy? Some pros and cons from Motley Fool analyst Kate Lee appeared first on The Motley Fool Australia. –

With Afterpay Ltd (ASX: APT) readying itself to merge with Square Inc (NYSE: SQ) and (mostly) leave the ASX, Zip Co Ltd (ASX: Z1P) is set to become the market’s largest buy now, pay later (BNPL) share.

But is it a buy? The Motley Fool Australia analyst Kate Lee joined our chief investment officer Scott Phillips to weigh up the sector’s second-largest company.

Those interested in the entirely of the pair’s conversation can find The Motley Fool Australia YouTube channel here. Otherwise, we’ve laid out the highlights below.

Right now, the Zip share price is $5.36.

A quick note before we start: Lee and Phillips discussed the ins and outs of Zip a few months ago. Thus, some of the specifics may have changed in the time since.

Breaking down the good and the bad of Zip shares

According to Lee, Zip shares have some definite strengths.

Zip is the ASX’s second-largest BNPL provider by market capitalisation. With a valuation of around $3.1 billion, Zip is around 10 times smaller than Afterpay.

However, come the end of financial year 2021, Zip recorded $403.2 million of revenue. Meanwhile, Afterpay saw $978.9 million of income on a constant currency basis.   

Additionally, as Lee points out, Zip’s results for the fourth quarter of financial year 2021 saw its revenue boosted by 104% on that of the prior corresponding period. She commented:

In a way, and of course from a small base, they are actually growing faster than Afterpay… Yes, [Zip] is the second best, but surely there’s some room to catch up in terms of valuation.

Zip is also branching out into the United States BNPL market. The company acquired QuadPay last year and has recently rebranded it to Zip in the United States.

Lee pointed that only around 1% of transactions in the US use a BNPL service.

For context, the global average is around 3% and, in Australia and the United Kingdom, it’s approximately 5%.

It seems the United States BNPL sector has room to grow, and it is growing quickly.

However, Lee isn’t entirely bullish on Zip shares. She said:

There are two big elephants in the room, which are: #1, Intensifying competition which is always a bad thing, and #2, Regulatory risks.

Lee stated the company might have a tough time expanding into the United States, and further afield, as industry competition is rife:

There are big guys, small guys, some combination of banking and Apple (NASDAQ: AAPL), and there’s PayPal (NASDAQ: PYPL), Square – with Afterpay now…

When the sector gets crowded, this means you can’t increase your fees as easily because you need to compete… and you probably need to spend more to keep up your pace of growth.

Another shadow that could pounce on Zip is that of regulators, which could increase pressure on the industry. That is, of course, a risk to all BNPL providers.

Finally, as Zip’s scale is smaller than its competitors, it hasn’t got access to the amount of information that players such as Afterpay do. Lee noted:

In this technology world, the value of information is very high… this user data [is fed] back to their algorithm or artificial intelligence to analyse, to do a better job of credit risk analysis, which is actually the core quality of [BNPL] providers.

So, maybe that explains why Afterpay’s expenses are around 1% of its total transactions. As against Zip’s [which is] actually creeping up and is now standing at about 2.2%.  

I’m not saying it won’t get better… but generally it has the winners in terms of economies of scale, in terms of cash spending.

Lee concludes that, while she sees value in Zip shares, she doesn’t personally think it will be a market beater over the long term.

The post Are Zip (ASX:Z1P) shares a buy? Some pros and cons from Motley Fool analyst Kate Lee appeared first on The Motley Fool Australia.

Should you invest $1,000 in Zip Co right now?

Before you consider Zip Co, you’ll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and Zip Co wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

More reading

Does the lower Zip Co (ASX:Z1P) share price make it a takeover target?

These are the 10 most shorted ASX shares

Why Magnis, Nanosonics, WiseTech, and Zip shares are dropping

Here’s what top brokers are saying about the Zip (ASX:Z1P) share price forecast

Why are Zip (ASX:Z1P) shares being shorted in November?

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO, Square, and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool Australia has recommended Apple and PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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