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(ASX: Z1P) | ZIP CO – UPDATED AS PER Q1 FY24

Jan 14, 2024

Sentiment: Sideways

Type of Trade: High Growth

Industry: BNPL

Sector: Financials, Information Technology

Zip is a diversified finance provider, offering consumers finance via a line of credit (via Zip Pay and Zip Money) and installment-based finance (via QuadPay and PayFlex); as well as lending to small to midsize enterprises (via Zip Business), Zip fortunes are largely tied to the nascent buy now, pay later, or BNPL, industry.

Most of its products—Zip Pay, QuadPay; and PayFlex-do not charge interest based on outstanding balances. Around 60%-70% of Zip Pay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest.

Zip has recently rebranded all its overseas business into ZIP in order to build strong and consistent brand presence across multi markets.

The company continue to grow its Merchants and customers numbers nevertheless with mediocre financial performance as its FY2022 earning results has reported a staggering $1 billion loss. While several so called analysts have all sort of opinions on its target price we still take ZIP as a great trading stock opportunity.

ZIP is a trading stock that has been incredible profitable for us in many trades.

Zip makes life more affordable by allowing people to pay for purchases over time. But who needs to pay for shopping over time? well teenagers and low incomes that are financially struggle, thereby posing risks for bad debt itself. Although ZIP aims to target credit card users as market target.

The company has reduced it growth pace and become more sustainable focus driven in the in the second half of CY2022. Most recent results show that ZIP has been capable to maintain its revenue margins healthy at >7% and has even improved its credit performance with net bad debits of 1.9% vs 2% despite this very harsh macroeconomic environment.

The goal – To achieve profitability by 2024

Latest Updates

On December 18, 2023, the company’s successful deleveraging plan and secured corporate funding for the next four years now allow Zip to undertake incentivized conversion and repayment of CVI Convertible Notes, expecting a modest positive impact on FY24 cash and liquidity.

Zip secures a new $150 million corporate debt facility, aiming to bolster its balance sheet, simplify capital structure, and support growth, while refinancing existing debt of $90 million.

Zip streamlined its capital structure by converting and repaying $40 million in CVI Convertible Notes to zero and achieved continued deleveraging, reducing Senior Convertible Notes’ face value to $85 million from $110.1 million on September 23.

Zip divides its pivoted focus to execute sustainable growth and accelerate to profitability in the following key actions:

✅ 1Q FY24 Zip achieves positive Group cash EBTDA, thereby proving to shareholders that Zip continued its strong momentum.

✅ Transaction volumes up by 11% YoY.

✅ Strong Group quarterly revenue of $204.4m (up 31.9% YoY)

✅ Revenue margin also improved to 8.9% (vs 7.5% in 1Q23)

✅ Transaction numbers for the quarter of 18m (up 6.1% YoY).

✅ US bad debts continued to perform well, with monthly loss rate approximately 1.3% of TTV, below the target range of 1.5%-2%.

✅ Strong presence in Travel sector should reflect into FY23 H2 numbers.

✅ Recent Google Partnership.

✅ The quarter saw further deleveraging of Zip’s balance sheet with $27.7 million of Zip’s Senior Convertible Notes converting, reducing outstanding face value of the notes.

Key cash burn wind downs:

In FY23, ZIP Co management has taken key cash burn wind downs enhance financial sustainability, aiming to bring back value to shareholders. We have seen the following:

  • ZIP completed the closure of Singapore and UK markets in order to reduce cash burn.
  • A strong reduction operating Expenditure with in internal reorganisation that has been reducing $30m people cost and bringing much improved financial benefit to FY 23.
  • ZIP also closed its business in Mexico in FY23, commenced the wind down of its operations in the Middle East.
  • Optimise repayments, which will increase repayment velocity.
  • Strong partnering and deep engagement with Qantas and Virgin Australia, Jetstar, Ebay, now with Google, giving ZIP a strong footprint on travel sector and also online leading platforms and integrations.

Macro Economics

Zip actively supports streamlined regulation and has engaged with Treasury on potential regulation of BNPL products in Australia, positioning itself for opportunities in what may become a regulated industry. Advocating for Option 2 in the Treasury’s November 2022 Options paper, Zip favors requiring BNPL providers to hold an Australian Credit Licence (ACL) and adhere to modified Responsible Lending Obligations, including credit and affordability checks.

Zip, already holding an ACL and complying with the National Consumer Credit Protection Act for Zip Money, feels well-prepared for any outcome from the Treasury review. Regarding FED and RBA monetary policy, the recent contraction in the business and Zip’s share price, driven by tight monetary policy, may improve as both FED and RBA are expected to end the interest rate hike cycle. The anticipation is that the FED might start cutting rates by mid-2023, potentially benefiting Zip’s stock price.

Technical Analysis

The ability of the company to growth worldwide as previously promised back in 2019 and 2020 has been rapidly diminished by closing operations and acceleration towards profitability as the company has seen its market capital reduced to under $300m in the last few months. We believe that the market has originally bought the idea of ZIP growing sustainably as Afterpay did, nevertheless did not take in account the difference of business model and mostly important the slow recycling cycle of cash by ZIP in comparison to Afterpay.

ZIP, despite having high-risk fundamentals and a seemingly weak business model, has been a remarkably profitable stock for us due to its favorable trading behavior, particularly driven by short traders’ squeezes, distinguishing it from companies with stronger business models. Notably, we observe a gradual decrease in the short position as the company reports its first EBITDA profitability, coupled with the anticipation of interest rate cuts in 2024.

Below you can see multiple SP swings allowing trades between 30-200% back in 2020 and 2021, before the bearish intersection that trigged the tech and growth stocks sell off.

In 2023, ZIP experienced a decline for the majority of the year amid high inflation levels, except for the last two months when the stock surged over 149% from its lows of 25 cents. If purchased 52 weeks ago, you would be down by 14%. However, the recent upward trend indicates a potential reversal, as the stock is currently trading in a bullish area above the SMA250, suggesting a sustainable long-term turnaround. Hypothetical support level is currently sitting just under 50c and any entry around 50c at technically fair price could be prone to further rally as macroeconomic scenario becomes favourable.

OUR PAST TRADES WITH ZIP

53% Profit in December 2023 – BGS 20 Strategy

https://www.facebook.com/groups/bgtrading/permalink/3209589816013248/

22% Profit in January 2023 – BGS 20 Strategy

https://www.facebook.com/groups/bgtrading/permalink/3009319706040261/

130% Profit in July 2022 – BG Trading Strategy https://www.facebook.com/groups/bgtrading/permalink/2939948196310746/

160% Profit in February – BG Trading Strategy https://www.facebook.com/groups/bgtrading/permalink/2506396272999276/

25% Profit in April – BGS 20 Strategy https://www.facebook.com/groups/bgtrading/permalink/2407075719597999/

20% Profit in October – BGS 20 Strategy https://www.facebook.com/groups/bgtrading/permalink/2407075719597999/

21% Profit in August – BGS 20 Strategy

Should I Buy (ASX: ZIP) Now?

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