Investors have recently watched the Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) share prices soar to the moon. For many investors, they want to be a part of such compelling growth stories and potential capital gains. When trying to compare Afterpay and Zip, it can be challenging to differentiate the two companies with both having similar business models, products and reporting metrics. As the buy now, pay later (BNPL) sector continues to heat up, here is why I believe the Zip share price represents a better opportunity than Afterpay.
Why I believe the Zip share price is a good buy
1. Zip metrics not that far behind Afterpay
Afterpay boasts a market capitalisation of $20 billion. This makes it as valuable as companies such as Coles Group Ltd (ASX: COL), Woodside Petroleum Limited (ASX: WPL) and Brambles Limited (ASX: BXB). On the flip side, Zip Co has a market capitalisation of just $2.6 billion.
Despite Afterpay being valued at nearly eight times more than Zip, Zip does not trail eight times behind its larger rival in terms of financial and operational performance. In Zip’s Q4 update, the company processed $570.7 million of sales with 2.1 million active customers and 24,500 active merchants. For the same time period, Afterpay delivered $3.8 billion in sales with 9.9 million active customers and 55,400 merchants.
Whilst these figures might suggest quite a contrast between the two BNPL rivals, it’s worth noting that Zip’s current reporting only takes into consideration its performance in Australia and New Zealand. Post completion of its acquisition of QuadPay, Zip will emerge as a global BNPL player, operating across five key markets in Australia, New Zealand, the United States, the United Kingdom and South Africa. This will bolster its performance metrics with pro-forma annualised transaction volume of $3.2 billion, annualised revenue of $252 million and more than 3.9 million customers.
2. Transformational acquisition to level playing field
The biggest market for all BNPL players is the giant $5 trillion US retail market. QuadPay represents an invaluable acquisition that provides Zip with much needed exposure to the US market. QuadPay has already demonstrated accelerating growth with more than 1.5 million customers on its platform and 3,500 merchants. This acquisition also brought about a unique, shop anywhere app which enables customers to pay in instalments in store or online at any merchant.
QuadPay continues to deliver significant growth, processing over 1.4 million transactions in Q4, an increase of 982% on the same period in FY19. This delivered a total transaction value of US$163 million for the quarter, up 9% QoQ and up 800% YoY.
I believe the Zip share price represents a better buy than Afterpay given its valuation and value proposition. The Afterpay share price has also had a significant run up which makes it challenging to buy from a risk/reward perspective. While both companies are arguably the most exciting recent growth stories in the Australian sharemarket, my money would be with the Zip share price.
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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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