#ZipAGM #Valuation #Isthemarketwrong?
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Table 1. Zip finances for FY18-FY21 and anticipated FY22 results added in from AGM.
Table 2. A comparison of BNPL – (note: Klarna not a publicly listed company)*Acknowledgement that this was adapted from Phil your mind on Youtube
Table 3. Global retail Total Addressable Market
(Apologies for formatting issues - Script editor did not like my tables - so numbers up the front party at the back)
I have spent the last few days digesting the latest ZIP AGM information and reviewing company results. This has led me to ask 2 questions:
1. Why does Zip trade at such low P/S multiples to its BNPL competitors?
2. What is unique about ZIP? If there is a USP (unique selling point) why isn’t the market getting it?
What we have just learnt from Zip is that October FY22 Total Transaction Volume (TTV: what we compare in the BNPL space) hit a new all-time monthly record and reached A$770m (remember that this is across its US, AU and NZ businesses).
Extrapolating out 12 months – $770 m x 12 with no growth baked in and no seasonal fluctuation and for only US, AU and NZ, Zip is likely looking at a FY22 TTV of $9B+.
FY22 in the table above shows slightly lower TTV these are results coming out of this weeks AGM – which are notoriously conservative and once again only account for US, AU and NZ figures.
See Table1.
Side note: Net bad debts are down for FY21 at 1.28%. Chairperson Diane Smith-Gander on ABC this week put this another way “only 1 in 100” Zip customers pay late.
In search of the answer to question 1: Why does Zip trade at such low P/S multiples to BNPL competitors?
I have cheated a little and adapted a table from Phil your mind on Youtube for a quick look at BNPL competitors. These are rough figures tabulated prior to this weeks AGM. I note there is some rounding in this table but it gives us a quick eyeball of what is going on in this space. Specifically how much TTV is passing down to Revenue for each of these companies.
See Table 2.
Klarna’s is not publicly listed – we know that this global player has its primary foothold in Europe. Its TTV appears huge but its revenue seems very low with low margins. However it has a staggering number of customers - 90m. There is frequent speculation of a Zip buyout from Klarna.
Zip clearly states its goal is to be the dominant global BNPL player in its own right. So I am going to set speculation about consolidation in this sector aside.
Affirm trades at a P/S multiple of roughly x42 it has an attractive 10% margin. So for every $100 in TTV $10 is generated in revenue. Afterpay trades at a P/S multiple of roughly x38. It has slightly lower margins of 4%. Not quite as attractive.
So where does this leave ZIP, as you can see for yourself Zip has a very low P/S multiple of x8. However it has a pretty impressive margin of 7.21%. So for every $100 in TTV $7 is generated in revenue. Pretty attractive.
So is the P/S ratio of Affirm and Afterpay woefully high? Or is the P/S ratio significantly undervalued for Zip? Why is there such a huge valuation gap?
What is the difference in these companies? Why is this occurring?
One could argue that the market has spoken with the Square / Afterpay deal and someone is prepared to pay these multiples for growth and dominance in this sector.
Why I believe these multiples are being accepted – a quick TAM breakdown (I know some hate the use of TAM so sorry to those members in the Strawman community, I am only highlighting the below figures to elucidate the size of the financial shift we are witnessing).
It appears that bigger players are prepared to pay handsomely for a company that can successfully harness customers with their platforms to gain exposure to this huge opportunity.
It is important to note that Zip released information at the AGM that it is planning to move more broadly and expand beyond retail sales into more mature markets as well. Zip has recently partnered with Virgin, setting itself up to take advantage of the world opening up.
This move into travel is clearly attractive, as Affirm has also cottoned on to this growth strategy and has announced a partnership with American Airlines in the US.
Zip has also partnered with Sabre to integrate its payment network across travel agents and hotels.
Zip has its sights set on moves into automotive, home improvement and the big one…..online recurring payments such as energy or telecommunications bills.
Let’s take a look at the second pre-posed question before drawing conclusions on the first.
Question 2. What is unique about ZIP? If there is a USP (unique selling point) why isn’t the market getting it?
I like the idea that you should be able to sum up what a business does in a sentence to ensure that you really get its mission.
“Zip wants to be your global payments solution.”
I believe this is Zips USP. Its business strategy varies from Afterpay and Affirm.
You will hear arguments that BNPL has no MOAT and that any player can enter and take a slice of the pie. My counter – Is can they do it well, globally?
Zip is unique in that they are already aiming for seamless global integration of their technology stack. Through both established and emerging markets. Zip’s technology allows a payment solution that already accounts for currency conversion and allows global companies wherever they are located in the world to transact and accept payments instantly. This bodes well for Zips touted move into crypto early next year- this global currency movement strategy should equally apply to digital currencies. Also note the purple wallet in Zips logo…..we all know it is coming.
Companies that are opting to use BNPL solutions that don’t have this global integration will likely be at a disadvantage. I can see this getting very messy for the likes of companies like Amazon who are partnering with different payment providers in different countries which seems odd and a bit of an accounting and forex headache. Hopefully Zip will solve this problem for Amazon!
It was only in May 2020 that Zip acquired Quadpay. It is now fully integrated as Zip.
In the past 18 months Zip has expanded into 10 new territories + Singapore (Singtel Dash just announced). Zip has used balance sheet proceeds or issued shares to enable these acquisitions and partnerships. This has been felt in Zips bottom line and resulting share price but currently none of this global TTV or Revenue has been added to Zips future Topline growth projections.
The Zip payment app is now trilingual – English, Spanish and French.
Zip has acquired or partnered with companies across these territories. It’s recent partnership with Zestmoney was not a full purchase and only a % ownership stake for now. Hence, revenue from this company is not likely to influence Zip’s Topline numbers in the near future.
The AGM finally released results from its purchase of TWISTO. We will get to this in a minute.
One can argue that Zip’s growth strategy has largely contributed to the divergence or valuation gap between its BNPL competitors. I have heard grumblings about Zips constant share price dilution and this being the major reason Zip is undervalued. Which is interesting to look at.
There is now roughly 600 million shares in circulation for Zip. The Twisto acquisition meant that roughly $180 million worth of new shares coming onto the market had to be absorbed. It is important to remember however that for every $100 in TTV $7 will be translated to revenue. So these extra shares bought Zip entrance into a new EU territory where it gained access to a business with a $328m TTV (roughly $23 million in revenue).
Twisto grew its TTV by 93% in Sept-21 vs Sept-20 and monthly active users for Twisto was up 65% for the same period. Twisto users are transacting on average 15 x per month equating to roughly $400 in spend. Remember the Twisto figures have not yet been included in the Zip TTV or revenue figures.
The AGM gave the first sign of guidance for these expanded global markets. Zip sign posts TTV of $50 million for December alone from these new global acquisitions in Spotti (Middle East), Payflex (Africa) and Twisto (Europe). These are 100% ownership stakes for Zip so should be incorporated into TTV from Q2-Q3 FY22. Followed shortly by Zip’s launch into Canada and Mexico. This equates to 5 new territories to add to Zips TTV and revenue shortly.
Zip copped a lot of flak for its US marketing spend and the Quadpay rebrand. There are arguments that marketing expenses are too high and Zip is spending too much money on acquiring new customers. This is the best bear argument that I have heard. Time is needed to see if Zips moves are bold or foolish.
I feel question 2 is answered for me. Zip has a global USP. I am prepared to pay $6.20 per share tomorrow to gain access to this expansion. I have just gained 5 new territories that will add to Zips TTV and revenue in FY22 and beyond.
What is even better than this is that I get to pay the same price tomorrow that I did at this time last year. So I get growth plus expansion baked in to the $6.20 share price.
So is 2020 my $6.20 bought me access to $397.50 worth of revenue in Zip.
In 2021 my same $6.20 buys me access to roughly $531 million dollars’ worth of revenue + Twisto, Payflex and Spotti’s revenue and potentially Zip Canada and Mexico’s revenue.
I am pretty happy with this uptick in value from a stagnant share price.
Back to question 1.
I don’t honestly believe that I have heard or have met anyone who can give me a plausible explanation of the valuation gap in the BNPL space.
Every analyst and the like discuss the net bad debt as the primary concern. This seems to weigh more heavily on Zip than its compatriots but Zip is showing that this is pretty well controlled year on year.
There is general commentary around the theme of inflation and market sell offs but this applies to all BNPL. Corporate earnings in the US especially are easing these ‘sky is falling’ concerns. There does seem to me to be a lot of bias in mainstream media outlets such as the AFR regarding Zip. There are frequent positive announcements surrounding Afterpay however even positive news regarding Zip has bearish under tones. I am not sure what/ if any vested interests may be at play here.
I think this mainstream bias has added to the general negative sentiment around Zip. The share price stagnation has not helped adding to the “what have you done for me lately attitude” As Matt Joass puts it in the Baby Giants podcast.
Furthermore analysts are only forecasting Zip’s share price based on Aus/NZ, US and UK markets. They are not factoring in other new territories. Either way it seems odd to me. I suspect the market will re-rate Zip in the future and I have put money on it.
Cheers
@Nnyck777
Ps. Sorry PDF tables didn’t paste and my jpeg images aren’t as clear and I couldn't manage to format in the body of the text. Oh well