Zip Co has rallied off the back of successful execution domestically and the adoption of an international expansion strategy (Credit: Small Caps)

Zip Co Ltd (ASX;Z1P) has been successfully growing its buy now pay later offering in the Australian market, which caused the share price to rally 195% over the past year. The share price rise is partially reflective of the company’s ability to maintain revenue growth of 108% despite their increased size, which highlights the success that the management team has had in improving the company’s growth profile.

The company has $84.2m in revenue and has recently achieved positive cash EBITDA. The ability to turn a profit has concerned some analysts of the buy now, pay later space, who fear that a market share grab will make it hard for companies to monetise their customer base. Unlike Afterpay however, Zip Co also provides longer term loans for which it does charge interest. This means that one part of its business has competitors that are profitable, meaning that profitability is less of a long-term concern for Zip.

One recent development in the business driving the rally is their acquisition of PartPay. The PartPay acquisition will help the company diversify into new geographies like the UK, US and South Africa, giving Zip easy access to the company’s base of more than a hundred thousand customers. International expansion was the main driver of Afterpay’s (ASX: APT) rally from $5 to over $25 today, so it is clear why investors are excited about the development.

Having started much earlier, Afterpay has a head start on Zip Co in offshore markets, so it remains to be seen how quickly Zip Co gains traction. If it does however, the potential for a multiple re-rate is appetising. Investors who are confident in Zip Co’s management and their ability to execute on the company’s international expansion strategy would do well to keep the business on their watchlist.

FlexiGroup (ASX: FXL), and Afterpay (ASX: APT) are also operating in the buy now, pay later space and represent a significant competitive threat to Zip. The prevailing view amongst investors in the sector is that the industry can support a few core businesses, which will develop competitive advantages from having a large amount of customer data from which credit models can be continually improved. The companies that are the most efficient at this process will be more attractive to merchants, given they can reduce fees through minimising losses arising from customer defaults.

 

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This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

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August 29, 2019