The Zip Co Ltd (ASX: Z1P) share price slumped more than 20% last week despite a strong quarterly result and a recent game changing acquisition. This compares to the likes of other buy now, pay later (BNPL) operators Afterpay Ltd (ASX: APT), Openpay Group Ltd (ASX: OPY) and Splitit Ltd (ASX: SPT) that all suffered smaller pullbacks. Could this be an opportunity to buy the Zip share price?
The company’s recent acquisition of United States-based, QuadPay, will result in QuadPay shareholders receiving up to a maximum of 119 million fully paid ordinary Zip Co shares, equivalent to 23.3% of its issued shares. Furthermore, Zip Co has also received $100 million in convertible notes with an initial conversion price of $5.53 and $100 million in warrants with an initial exercise price of $5.16 from US private equity firm, Susquehanna International Group.
Q4 FY20 update
On 15 July, Zip Co provided a trading update for the quarter ending 30 June 2020. The update delivered sound improvements in all key metrics with quarterly revenue increasing 64% to $44.2 million, its merchant base increasing 51% to 24,500 and active customers increasing 60% to 2.1 million on the prior corresponding period. Pleasingly, the company beat the goals it had set in 2019 with a target of $2.2 billion in annualised transaction volume. Based on Q4 results, its total transaction volume (TTV) sits at $2.3 billion or $3.2 billion if QuadPay is included.
The recent quarter also saw continued investment in product innovation to make it easier for global retailers to onboard Zip’s products and additional verticals for customers. This includes the launch of its food ordering app called Hey You, its first global payments partner, the Cotton On Group, and fast tracking its Shop Everywhere feature that allows customers to transact at any merchant online using a one-time virtual card.
QuadPay delivered very strong numbers with a TTV of US$163 million for the quarter, up 9% QoQ and 800% YoY. Active customers continued to increase as a result of strong online spending in the US. More than 325,000 new customers were added bringing total customers to 1.8 million up 475% on the same period in FY19.
Is the Zip share price a buy?
BNPL shares have always been very volatile but for the right reasons. Zip Co’s Q4 update showed reasonable growth for its maturing Australian business and explosive figures in the US. I believe the acquisition of QuadPay is a game changer for Zip on all fronts. It bolsters the company’s financial performance and opportunity for cross-company collaboration as well as taps into a $5 trillion US retail market. Despite gaining back 2.5% to currently trade at $6.05, I believe the Zip share price represents fair value after the significant discount last week.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. 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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