Buy now, pay later (BNPL) player Zip Co Ltd (ASX: Z1P) has been on a wild rollercoaster ride this year.
Zip shares started 2021 in the mid $5s, then peaked as high as $13.92 in February. Since then the valuation has suffered like many of its growth cohorts. At the time of writing, the Zip share price is down 1.24%, trading at $7.16.
So is it an investment opportunity now? Is it effectively buying in at half-price?
Shaw and Partners analyst Jono Higgins reckons so.
"We've got a 12-month price target of $16 per share on the stock. So we think a potential catalyst on that would be good quarterlies, merchant announcements and the like," he told the Direct From The Desk podcast.
"Particularly large and strategic merchant announcements, as well as just continued growth. The benefit of a business growing like this is that over time, as long as the growth dominates, the share price should look after itself."
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BNPL sector growth is 'extraordinary'
While stiff competition is a risk for all buy now, pay later providers, the industry is still in a high-growth phase, according to Higgins.
"We think Zip will outperform on the back of a number of different dynamics, but the whole sector is performing very strongly and we're seeing some exceptional growth rates," he said.
"We're seeing Zip adding 8,000 customers a day. We're seeing Afterpay Ltd (ASX: APT) adding 15,000 customers a day. We're seeing Klarna adding 20,000 customers a day. Sezzle Inc (ASX: SZL) adding 5,000. These growth rates are extraordinary and they seem to be increasing."
Higgins reckons if a company can keep increasing its growth rate then the valuation will catch up very easily.
"Zip's on something like 6 times forward sales into FY22. If they grow their sales at 100% the next year, then they'll be on 3 times forward sales," he said.
"If the market's prepared [next year] to still pay 6 times forward sales, then the share price will effectively double over the next 12 months and that's with no rewriting. That's what's attracting us to the sector."
Excellent leadership
Higgins is a big fan of the people running Zip.
"I recall meeting management when they were doing a few hundred thousand dollars in sales and struggling to get finance out of venture capital firms in the US — and getting charged 15% to do it," he said.
"I'm [now] looking at a management team that's been dynamic and grown up to a $450, $500 million annualised sales run rate. [And they've] made an overseas acquisition, which has been incredibly successful and is now one of two major payment players that are worth in the billion dollars."
The acquisition he refers to is the buyout of the American rival Quadpay.
"They still have Brad Lindenberg and Adam Ezra involved there who were the founders of [Quadpay]," Higgins said.
"They've got really strong management in the UK. They've been picking up people from PayPal Holdings Inc (NASDAQ: PYPL), Amazon.com Inc (NASDAQ: AMZN), Shopify Inc (NYSE: SHOP). I think they have really built the second tier of management to take this business to the wider stage."
Watch out for buyouts and mergers
With so many different players in the industry, Higgins expects consolidation in the future.
"In the short term, I think you do want to be careful of the smaller players. Our view is to be careful with the smaller players because the larger players effectively have the capital to really go after them, and they can raise capital at very short notice and they can fight them in the checkout," he said.
"So we think just keep to number one and two on the ASX. That's Zip and Afterpay."
