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Could Zip Co and AfterPay get smashed like Menulog?

The Zip Co Ltd (ASX: Z1P) share price hit a record high of $1.80 this morning as excitement around the growth of the buy-now-pay-later consumer credit sector continues to build.

For the six-month period ending December 31 2018 Zip Co posted a net loss of $6.76 million on revenue of $34.2 million, with it now boasting over 12,600 retail partners and 1 million consumers signed up.

Retail partner growth of 62% and consumer sign-up growth of 100% sounds impressive, unless of course you’re an AfterPay (ASX: APT) investor.

In which case it sounds slightly pathetic, given Afterpay grew consumer and retail partner sign ups 118% and 101% respectively off a much larger base.

Zip now has a market value of $567 million based on a $1.80 share price and this is arguably expensive given the industry does not possess high barriers to entry or pricing power.

For example a deep pocketed competitor could come along and offer retailers better terms (e.g lower fixed fees on sales such as 1%) just to win market share, while running at a loss.

For example we have seen this type of scenario recently in the food delivery aggregator space, where incumber and disruptor Menulog has been hammered by very deep-pocketed overseas competitors like Deliveroo, Foodora and Uber Eats. All of whom  run at a loss for now to win market share.

In the future it’s possible that Zip and AfterPay could meet the buy-now-pay-later versions of Deliveroo or Uber Eats.

Therefore the low barriers to entry mean I wouldn’t recommend betting too much on these companies, even if you’re still a believer in their long-term growth potential.

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Motley Fool contributor Tom Richardson owns shares of AFTERPAY T FPO and Just Eat the owner of Menulog.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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