The Zip Co Ltd (ASX: ZIP) share price could be great value at the current level.
That's the view of the team at Shaw and Partners, which see significant upside potential in its shares.
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What is the broker saying about the Zip share price?
According to the note, the broker has responded to the buy now pay later (BNPL) provider's half-year results by retaining its buy rating with an ever so slightly trimmed price target of $2.02.
Based on the current Zip share price of 53 cents, this implies staggering potential upside of 280% for investors over the next 12 months.
Though, it is worth noting that given the incredibly high reward, the broker's recommendation comes with a high risk rating.
Why is the broker bullish?
Firstly, Shaw and Partners was impressed with Zip's performance during the first half. It notes that its results support its investment thesis and provides "evidence towards the turnaround occurring."
The broker also notes that this was achieved despite operating in a tough economic environment. It commented:
ZIP delivered 1H23 cash NTM's of 3.5% and gross profit of $122m, which was 35% of revenues and increased YoY ahead of revenues. This is a strong result in the context of the yield (funding/interest rate) and macro (BDD) environment.
Its analysts also appear to see scope for Zip to ease back on its risk settings in the US market given its extremely low credit losses. They add:
We suspect TV has been throttled slightly too much in the USA with credit losses at a measly 1.4%, noting that APT back in the day was targeting NTL of ~2%.
In addition, the broker also believes that this is a clear demonstration of the way that Zip can manage its credit losses (and other factors) better than the market was expecting. It appears to see this as something which could help drive the Zip share price towards its price target over time. It concludes:
Importantly over time we expect recognition to emerge that ZIP can control yields, credit (BDD) and cost base better than the market is currently giving credit towards. Furthermore, ZIP's product construct is attractive to strategic acquirers in our view with Australia leading the way towards BNPL moving towards credit legislation.
