The Zip Co Ltd (ASX: Z1P) share price has dropped by 13% over the last month. What is happening to the buy now, pay later company?
The buy now, pay later industry is in focus after Afterpay Ltd (ASX: APT) was pounced on by Square Inc (NYSE: SQ) in a takeover.
In that time, Zip has reported its FY21 result. Investors often like to base the share price on the performance of the business.
How good was Zip's FY21 report?
Zip reported triple digit growth in the last financial year.
It said that it achieved $403.2 million of revenue, an increase of 150% year on year.
Transaction volumes for FY21 were $5.8 billion, up 176% year on year. Transaction numbers were 41.3 million, an increase of 293%. Customer numbers rose 248% to 7.3 million. Merchants on Zip's networked increased to 51,300 – an increase of 109%.
The buy now, pay later business said that its revenue as a percentage of transaction volumes was 7%. Zip said that it maintained strong unit economics while investing for, and delivering, strong growth – the cash transaction margin for FY21 was 3.5%.
It also said that it delivered a strong credit performance in light of COVID-19, driven by repeat customer usage and investments in its decisioning capabilities. Net bad debts as a percentage of transaction volume was 1.28%.
Zip disclosed that it was the US that delivered a large amount of the growth. The Zip US business saw revenue of $176 million, which was pro forma growth of 269%. US transaction volume in dollar terms was $2.45 billion – pro forma growth of 225%. In terms of the number of transactions, the US saw 14.3 million transactions – a pro forma increase of 244%.
The company said that it made a cash earnings before tax, depreciation and amortisation (EBTDA) loss of $22.9 million in FY21.
It is also focused on growing its international buy now, pay later operations.
The Zip share price has fallen by 7.5% since the release of this result.
What did analysts make of the result?
Opinions were somewhat different about the result.
The broker Ord Minnett noted that Zip's earnings before interest, tax, depreciation and amortisation (EBITDA) wasn't as good as the broker had forecast because of an increased level of expenditure.
However, both Ord Minnett and another broker, UBS, believe that the Zip US business (Quadpay) will play an even bigger part in Zip's future.
Whilst UBS expects that Zip's revenue will continue to grow strongly, its expenses are likely to grow at a fast pace too. That's one of the main reasons why UBS has a sell rating on Zip, with a price target for the Zip share price of $5.40. That suggests that UBS believes that the buy now, pay later business will fall by approximately 20% over the next 12 months.
Ord Minnett has a very different outlook. It has a buy rating on Zip shares with a price target of $9.50. That means the broker reckons Zip shares could rise by around 40% over the next 12 months, if the broker is right.
How has FY22 started for Zip?
Zip revealed with its FY21 result that transaction growth continued in FY22. Between 1 July 2021 and 22 August 2021, Australian transaction volumes were up 58% year on year and US transaction volumes were up 240%.
