The Zip share price is a buy with 180% upside: broker

The buy now, pay later company's shares have loads of growth potential, according to one broker.

| More on:
A boy standing on the edge of a cliff peers at a red flag in the distance through binoculars.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • One broker thinks the Zip share price has plenty of upside
  • Ord Minnett has a price target of $4 a share on the business
  • The broker sees the planned merger with Sezzle as a positive

One broker thinks the Zip Co Ltd (ASX: Z1P) share price can deliver an enormous amount of growth.

The buy now, pay later business has seen a lot of difficulty over the last year. In 2022 alone, it has fallen by 69%. Over the last 12 months, the Zip share price has dropped by 84%.

But the broker Ord Minnett has a price target on the company that implies a significant upside.

Optimism for the Zip share price

The broker has a price target of $4 on Zip shares. That implies a potential upside of more than 180% over the next 12 months.

One of the positives for the broker is the planned acquisition of Zip's BNPL competitor Sezzle Inc (ASX: SZL).

According to the merger presentation, if the two combined, Zip would have 13.3 million global customers and 8.8 million US customers. It would also have 128,800 global merchants, with 60,500 of those being in the US.

When announcing the acquisition, Zip said that the proposed transaction is expected to be accretive to revenue per share and accretive to earnings before tax, depreciation and amortisation (EBTDA) in FY24, including the full impact of potential synergies.

Zip suggested that EBTDA could benefit from up to approximately A$130 million EBTDA in FY24, of which $60 million to $80 million would be cost synergies.

Zip expects to be EBTDA and cash flow positive during FY24, including the full impact of potential synergies.

The company also conducted a capital raising to support sustainable growth. It raised $148.7 million in an institutional placement.

Ord Minnett thinks that the business now has enough money to see it through to being cash flow positive with EBTDA.

Is the core business still growing?

The Zip share price has fallen despite the company continuing to report growth.

Since the beginning of March, Zip shares have fallen 37%. But in the February reporting season, it reported plenty of growth.

Its FY22 first-half revenue rose 89% to $302.2 million, transaction volume grew 93% to $4.5 billion, and customer numbers rose 74% to 9.9 million. The revenue margin was 6.7%.

Its Australian division delivered the 14th consecutive quarter of positive cash flow.

However, during the period, the cash transaction margin declined to 2.1% (from 3.7% in HY21), reflecting rising bad debt costs reflective of current credit headwinds as well as increasing weighting towards the rest of the world.

To combat the lower margin, Zip said it's addressing its risk decisioning policies and its collections and recoveries processes to immediately address the credit performance.

In the medium-term, Zip said that it's expecting to deliver a cash transaction margin of between 2.5% to 3%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Oil industry worker climbing up metal construction and smiling.
Energy Shares

ASX 200 energy shares lead the market as US trade deals fuel optimism

ASX energy shares lifted 3.94% as more US trade deals led to improved market sentiment.

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Broker Notes

These ASX 200 shares could rise 50% to 60%

Brokers believe these shares could deliver big returns for investors.

Read more »

A girl is handed an oversized ice cream cone with lots of different flavours.
Best Shares

8 ASX All Ords shares that tripled in value in FY25

Just 8 out of the 500 companies making up the ASX All Ords achieved share price growth of 200% or…

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Woman with a scared look has hands on her face.
Broker Notes

Bapcor shares fell more than 30% yesterday. Should investors buy in the dip?

Is this a value opportunity?

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Broker Notes

Broker raises price targets on 2 ASX 200 shares to buy

Ord Minnett has just upped its 12-month share price targets on 2 buy-rated ASX 200 stocks.

Read more »

Man with rocket wings which have flames coming out of them.
Share Gainers

Guess which ASX All Ords stock just rocketed 34% on strong earnings growth

Investors just sent this ASX All Ords stock surging 34%. Here’s what’s happening.

Read more »