In the realm of financial analysis, Zip Co (ASX:Z1P) has recently disclosed its 1H21 financial results, stirring interest among investors and analysts. While the reported NPAT loss of approximately A$453 million reflects various one-off items, including a net revaluation of Quadpay (-A$306m) and performance shares issued due to met hurdles (~-A$64m), a deeper dive reveals an underlying loss of ~A$114 million, surpassing previous estimates due to increased expenses (-A$30m).

Strong Momentum in the US Market

Despite these financial intricacies, Zip Co's strategic investments to foster growth have exceeded expectations. Notably, the company is gaining significant traction in the United States market, indicating a promising trajectory.

Key Highlights and Achievements

Positive Developments

  • Revenue Growth: Revenue stood at A$160 million (+131%), driven by robust year-over-year (yoy) Total Transaction Value (TTV) growth of 141% to ~A$2.3 billion.
  • Effective Risk Management: Net bad debts were well-contained at 1.93%, down from 2.24% in the prior corresponding period (pcp).
  • Operational Milestones: Australia remains cash Earnings Before Interest, Taxes, Depreciation, and Amortization (EBTDA) positive, achieving Cash EBTDA breakeven.
  • Expansion Initiatives: Zip Co's entry into the UK market, accompanied by collaborations with prominent brands, signals a promising market entry strategy.

Quadpay Performance

  • Rapid Growth: Quadpay witnessed rapid growth in 1H21, with TTV reaching A$973 million and customer base expanding to 3.2 million, both reflecting over 200% growth compared to the pcp.
  • Capital Efficiency: The net transaction margin for Quadpay remains above 2%, contributing to enhanced group capital efficiency and improved revenue yield.

Australian Market Dominance

  • Market Leadership: Zip Co's BNPL app emerged as Australia's most downloaded app in December 2020 and January 2021, underscoring its dominance in the domestic market.
  • Robust Growth Metrics: Key performance metrics such as revenue and customer base witnessed substantial growth, ranging between 40% to 60% for the half-year period.

Areas of Concern

  • Increased Marketing Costs: Marketing expenses surged over fourfold (~A$26m compared to A$6m in the pcp), attributed to Quadpay integration, product launches (e.g., Tap and Zip), and heightened brand activities.
  • Leverage Compression: Zip Co's high growth phase may lead to near-term compression in its cash EBITDA performance, evident in the 1H21 figure of A$0.2 million.

Revised Forecasts and Investment Strategy

Considering the evolving landscape, adjustments to forecasts are imperative. The FY21F/FY22F EPS is revised downwards by over 50% to account for current-year one-offs and increased investment across forecasted periods. Furthermore, a transition from a Discounted Cash Flow (DCF) valuation to a blended DCF/Price-to-Sales (PS) methodology has been made, resulting in a revised price target.

Navigating Towards Global Payments Leadership

Despite the challenges and adjustments, Zip Co maintains a significant PS discount compared to Afterpay (APT), indicating substantial growth potential. As the company continues to execute its strategy towards becoming a global payments leader, investors remain optimistic about its future prospects. With a strong foothold in the Australian market and promising growth trajectories in the US and UK markets, Zip Co stands poised for further expansion and market dominance in the evolving landscape of Buy Now Pay Later (BNPL) services.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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