Once a market darling with huge prospects for growth in the US Buy Now Pay Later (BNPL) space, Zip has now fallen to near 2 year lows with a disappointing update this week causing the latest round of selling. The update came out of cycle, ahead of their scheduled half year report tomorrow which will now likely be more focussed on their potential takeover of rival Sezzle (SZL). While we cut Z1P from our Flagship Growth Portfolio and reduced our weighting down to a small 3% in the Emerging Companies Portfolio, we know Zip is a widely held stock, and it’s decline is unsettling.
One of the most bullish analysts in the market on Zip has been Shaw & Partners Jono Higgins. After this week’s update, Jono put his rating to ‘under review’ awaiting more information from the 1H22 earnings due out tomorrow – a number of analysts have done the same. Clearly such a bullish stance has been the wrong call in more recent times, although the stock did rally to $16 in early 2021! In his note on Tuesday morning he has sighted two main issues in Mondays update that are material. The first was the EBTDA loss of -$108m in the half which compares to +$0.2m in 1H21 and -$23.1m in 2H21. The more benign contributors for the loss are an increase in headcount and the rebrand that took place, but the less benign element was a concerning deterioration in cash margins in 1H22.
Here’s what Jono had to say on this: Cash TV margins declined 1.2% from 2H22 (~3.3%) and as a % of revenue were 31% in 1H22 driving the majority of the loss greater than Shaw expected. Net BDD of 2.6% of TV compares with 1.28% in FY21 and represents an increase of 132bps driven by expansion markets (outside of ANZ) it appears. Whilst management has flagged adjusting for risk settings, this will likely result in lower near term growth, unless augmented with larger merchants (of which 1H22 has seen slower execution on than in the past). With further growth objectives around offline cards, browser and new markets coming online, Zip needs to deliver growth into further prime customer subsets internationally in line with Aus experience.
In other words, more people than before are going bad on their debts and margins have taken a big hit as a result. When growth slows and margins decline the impact is material, i.e. the unit economics are really tested. They did say that cost cutting will become a focus and more information on this should be provided tomorrow, we will await more details here.
MM will make a call on Zip post Thursdays results
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