The Zip Co Ltd (ASX: Z1P) share price has leapt up by 47.7% in just the past month, giving it a market capitalisation of $3.47 billion. Consequently, many investors are asking if this share is too expensive to buy. Should shrewd investors expect more growth from this company? Or is it a bubble just waiting to burst?
The stratospheric market cap of buy now, pay later (BNPL) stablemate Afterpay Ltd (ASX: APT) also complicates things. Afterpay has a current valuation of $24.86 billion. A value that bears no resemblance to reality, particularly as it doesn't make a profit.
High market capitalisation is a new phenomenon for the ASX. However, in the United States, companies like salesforce.com, inc. (NYSE: CRM) have seen many low earnings per share (EPS) results, including 5 negative results since 2010. Yet it has a market cap of US$244.26 billion. To illustrate further, Salesforce generates approximately a third of the revenues of CSL Limited (ASX: CSL), yet has almost double the market cap.
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Why so much interest in the Zip Co share price?
Even though they are not the first in the industry, Zip Co and Afterpay have become the two binary stars of this emerging sector. In addition, the rise of the BNPL sector corresponds with a reduction in credit card accounts. For example, the number of Australian credit card accounts peaked at 16,761,187 in April of 2017. By 29 June 2020, it had fallen to 14,088,998, a 16% reduction. Something the Zip Co annual report informs us is part of a global trend.
Moreover, the BNPL sector has arguably contributed to many companies being able to survive the coronavirus lockdowns. By allowing people to spend beyond their immediate means with no additional cost, it has helped merchants across the nation to maintain and increase sales.
Having kicked off a booming industry sector in Australia, both companies are now forcing their way into the gigantic markets of the US and Europe. Zip Co presently has an active presence in Australia and New Zealand, the United Kingdom, the US and South Africa. The company's share price caught the market's attention after announcing it was buying Quadpay, a US BNPL company. In FY20, Zip Co achieved some impressive results including reaching more than 2.1 million customers and 24,500 partners, record full-year revenue of $161.0 million, and a record transaction volume of $2.1 billion.
What's more, the company has secured many lucrative partnerships. These include Amazon.com, Inc. (NASDAQ: AMZN) and deals with Cotton On, Bunnings, and PetBarn. Moreover, the Zip Co share price was set ablaze again recently by the deal with eBay Australia. This is where the differences between Zip and its peers start to become clearer. Zip Co bought a company called SpotCap in 2019. This has morphed into Zip Business, a subsidiary operating in Australia, New Zealand, the UK, the Netherlands, and Spain. Zip Business will provide cashflow finance to small and medium enterprises on eBay, as well as invoice financing and lines of credit.
Foolish takeaway
Zip Co has been one of the primary pioneers of the BNPL sector in Australia. Moreover, global sector domination is clearly in its sights. Personally, I welcome the differences that Zip Co has built into its business model. Specifically, flexible payment timelines instead of four payments, stricter credit assessments and bringing its expertise to the business sector. A mark of the company's discipline is that bad debts, in the age of coronavirus, are running at only 2.44%.
I think Zip Co is slowly building an alternative finance company of the near future, something we have not seen at this scale before. Accordingly, I believe Zip Co shares are a great investment at the current price. Moreover, I think Australian investors are going to have to start getting used to the high valuations of our global ASX leaders.
