Is the Zip (ASX:Z1P) share price a buy now or buy later?

Could the Zip Co Ltd (ASX:Z1P) share price be a buy now, or is it a buy later? Leading brokers have opposite opinions about the BNPL company.

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The Zip Co Ltd (ASX: Z1P) share price has been pummelled in recent weeks, does that make it a buy now or buy later?

The Zip share price has actually fallen by almost 40% since 16 February 2021. That's an even stronger decline than what has happened to Afterpay Ltd (ASX: APT) over the same time period.

Since the start of the decline, Zip has reported its FY21 half-year result, so let's look at those numbers:

FY21 half-year report

Zip reported that in the six months to 31 December 2020 it delivered record transaction volume (TTV) of $2.3 billion, which was up 141% year on year. Zip said that this is now annualising at more than $7.5 billion as at December 2020.

The increase in TTV led to revenue growing by 130% year on year to $160 million – this is annualising at more than $480 million as at December 2020.

Zip said that it delivered positive cash earnings before tax, depreciation and amortisation (EBTDA) in the first half with cash gross profit margins increased to 54%. Management boasted that this demonstrated market leading unit economics whilst investing for global growth.

The buy now, pay later business completed its acquisition of Quadpay in August 2020, which operates in the US. It has grown its TTV by more than 130% in the four months since the deal was completed.

Zip said that the addition of Quadpay has delivered a step change in unit economics, revenue yield and capital efficiency for the company. Revenue as a percentage of TTV was 6.89%, the gross margin as a percentage of TTV was 3.71% and the blended book is now recycling every three months on average.

There was significant growth of customers, which went up 217% year on year to 5.7 million, whilst it ended with 38,500 merchants across the US, Australia, New Zealand and the UK.

Some of the latest merchants to sign up include Gamestop, Sunglass Hut, Harvey Norman Holdings Limited (ASX: HVN) and Adore Beauty Group Ltd (ASX: ABY).

What do brokers think of the Zip share price?

There's quite a divergent view of Zip shares at the moment.

At one end there's a broker such as Morgans which has a share price target for Zip of just over $12. Morgans thinks that Zip is growing strongly, especially in North America. However, it's spending a lot to do it. The broker acknowledged that Zip is investing in a number of different areas, including new offerings for customers.

However, the brokers at Macquarie Group Ltd (ASX: MQG) have a much less rosy outlook for Zip shares with a price target of $5.70. Macquarie says that Quadpay has very good net transaction margins, however future competition may mean that the margin reduces over time. The broker is wary of the high valuation and the higher costs.

New competition in Australia

Zip is also going to have to come to terms with the fact that Commonwealth Bank of Australia (ASX: CBA) is launching its own buy now, pay later product. It will be able to be used anywhere that Mastercard is accepted.

There will be a limit of $1,000 and it'll be repaid in four fortnightly instalments for transactions higher than $100.

CBA paid particular attention to note that the cost would be lower for merchants because there are no additional fees to businesses, just the standard merchant fee. Customers aren't charged ongoing fees, just a late fee of $10 per missed instalment repayment – up to a cap.

Zip may need to react to this development to ensure continuing long term growth in Australia.

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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