Zip Co is up 250% this year on the back of successful execution (Credit: Peter Alexander)

Zip Co (ASX:Z1P) rallied 9% yesterday on no news, making it the top performer on the ASX 200. This rally shows just how strong the uptrend in buy now, pay later providers are, as markets continue to digest recent positive news in the sector.

One recent piece of news is a capital raising conducted by NAB. This capital raising allowed the company to continue to lend money out to their clients, enabling the company to continue executing on its growth strategy. The deal increases confidence in the institution, since banks have rigorous credit approval processes on such large loans. Nevertheless, since it was announced a few days ago, it was already in the price. As such, while it contributed to Zip Co’s 250% share price rally over the past year, it was not the sole reason for the rally yesterday.

Another reason for their rally is their recent annual results. 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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September 5, 2019