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

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 14^th 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%.