From riches to rags: Why there’s still life in this fintech – Chris Conway

by James · August 24, 2022

Few stocks generate as much conversation and diametrically opposed opinions as this fintech. You either love it or you hate it. And that’s probably determined by which side of the share price rollercoaster you were on over the last couple of years.

It hasn’t been an easy ride over the past 12 months for this name, or the sector it operates in, with its share price falling from around $8 to $1 over the period. I’m of course talking about buy-now-pay-later (BNPL) company Zip Co (ASX:Z1P)

Today, Zip announced a loss of $1.1 billion. While such a large number carries with it something for shareholders, much of this number was based on write-downs, and there are positive things happening under the surface. Across the key metrics of customer numbers, transactions and total transaction volume, there was some growth.

In this thread, I reached out to my old friend and colleague, Henry Jennings of Marcus Today, for his take on the numbers and what he thinks ZIP needs to do now to maintain momentum on the road to profitability.

“The message to investors is that they’ve changed, they’re listening, they can’t keep going the way they’re going … and they’re moving toward a more sustainable model,” Jennings said.

Zip Co (ZIP) FY22 Key Results

Revenue $620 million, up 57%
NPAT ($1.11 billion), down from ($678.1 million) a year ago
Total transaction volume (TTV) of $8.7 billion, up 51%
Transactions of 74.3 million, up 80%
Customer numbers up to 11.4 million, up 56%
Cash gross profit $203.7 million, up 12%
EDITBA of ($207 million)
Cash of $279 million

Note: This interview took place on August 25, 2022.

Table of Contents

What were the main takeaways from this result? What surprised you the most?

The most important thing was the big number, the $1.1 billion loss these guys had. The market was prepared for that in some respects, due to the $820 million odd write-off in goodwill from some of their acquisitions.

The other thing that’s key to the ZIP story is the way they’re closing the UK and Singapore and going back to basics, trying to move people up the value chain with ZIP Money, which is a long-term, higher-margin business. .

The US is clearly still the big opportunity, but the amount of money they have to spend on customer acquisition, bad debt, IT and all the other things is extraordinary and it has taken its toll on the balance sheet and the company.

The message to investors is that they have changed, they are listening, they cannot continue the way they are going… And they are moving towards a more sustainable model. The key, of course, will be bad debt and credit losses, especially in the US and the tougher environment we see.

What was the market’s reaction to this result? Was this an overreaction, an underreaction, or appropriate?

It’s a bit of a ho-hum reaction. When the numbers came out the stock was selling at 92c and then there was a PR blitz by (founders) Peter Gray and Larry Diamond – I saw them on CNBC – so the stock went up a bit. There is about 9.5% short interest in the stock as well, so I was quite surprised that once it started going up, it didn’t do so well. At the moment it’s kind of a line ball in terms of the reaction. I think the market still needs to digest the scale of the losses.

Would you buy, hold or sell Zip Co based on these results?

Rating: BUY

I have to say that I am wrong about a purchase, because they are making progress and there is a huge opportunity in the US. And they are scaling back by shutting down the UK.

What was interesting is that they still have operations in Croatia, South Africa and Mexico – you’d think the periphery of the big game, the US and Australia.

What is your view on Zip Co and its sector over FY23?

It is positive. They have made good progress in reducing costs and getting on top of bad debts. They are heading in the right direction, although it is not the best buy-now-pay-later environment given the looming European recession and potential recessions in the US and Australia. They have cash, they have flexibility, they seem to have systems in place, and they are on a mission to drive down bad debt… these are the important things.

They are going to go out of business very quickly if it costs them more than they actually earn. That’s not a recipe for long-term success.

Are there any risks to Zip Co and the buy-now-pay-later sector that investors should be aware of given the current market environment?

BNPL is now really just ZIP, with some peripheral players. We also have Square, but it is now clouded with many businesses and it is difficult to distinguish what is Afterpay, what is bitcoin and what is the cash transaction business.

Zip Co is emerging as the business in the BNPL space, and as consumers feel the pinch with higher mortgage rates and energy prices etc, we will see BNPL continue to be quite popular, which may invite the ire of regulators.

As BNPL moves into everyday goods, like paying for your groceries with BNPL, we are going to see more regulation – which could be good or bad. At least that will keep the bad boys out of the business. I think ZIP has a future, especially if they can move up the money chain with Zip Money, but they need to cut the cost of doing business.

From 1-5, where 1 is cheap and 5 is expensive, how much value do you see in the market right now? Are you excited or are you cautious about the market in general?

Grade: 3-3.5

We’ve just come through the reporting season, so it’s very spotty – some good, some bad. However, the general consensus is that we have recovered. We’re seeing a bit of a downgrade cycle for some companies, but even Qantas (ASX:QAN) We have seen their results today Nine Entertainment (ASX:NEC) doing well, Seven Group (ASX:SVW) doing well. So we’re seeing upgrades come through and companies seem to be able to continue these inflationary pressures. They also have strong balance sheets, and they are not indicative of future disasters. Obviously September has some risk to the market in terms of the Fed, CPI and the US coming back from the holidays, but overall the market doesn’t feel too bad… I don’t see a massive correction again and I’m not sure what which can trigger it.

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