Zip Co Ltd (ASX: ZIP) shares are having a good session on Wednesday.
At the time of writing, the buy now pay later (BNPL) provider's shares are up over 2% to $3.01.
The good news for shareholders is that this could be the start of even greater gains according to analysts at Macquarie Group Ltd (ASX: MQG).
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What is the broker saying?
Macquarie has been busy running the rule over Zip's unit economics and was reasonably pleased with what it saw.
While it acknowledges that Zip's rapid total transaction value (TTV) growth is driving higher loss rates, it feels there is some seasonality impacts. Importantly, Macquarie believes the company is still positioned to achieve its net transaction margin guidance. It explains:
Loan losses to TTV are being impacted by: 1) product mix, with introduction of Pay-in-8; and 2) new client growth. Growth in new clients has a direct impact on loan losses (and somewhat represents the 'acquisition cost' of new customers). New customers have a higher loss rate than mature customers. The instalment-based product at the core of the ZIP offering enables the group to quickly remove customers that don't meet payments and, if the customer cures, re-instate credit availability.
US Segment Payback: FY25 US Segment Cash Gross Profit per customer covered the US Segment Net Loss per customer in ~116 days. The speed of 'payback' illustrates the positive trade-off between extending credit to grow customers despite the 'acquisition cost' increase in loss rate. […] We forecast the Net Transaction Margin to remain within guidance of 3.8%-4.2% in FY26, despite the rate of TTV growth elevating loss rates.
Zip shares tipped to rise strongly
According to the note, the broker has retained its outperform rating and $4.85 price target on Zip's shares.
Based on its current share price, this implies potential upside of just over 60% for investors between now and this time next year.
This means that if Macquarie was on the money with its recommendation, a $10,000 investment would turn into approximately $16,000 in 12 months.
Commenting on its buy recommendation, the broker said:
Outperform. We forecast Zip to continue to deliver rapid growth supported by increased product adoption, expansion of merchant network, increased customer engagement and digital product innovation.
Catalysts: We expect ZIP to deliver attractive TTV growth and NTM in the guidance range, with potential upside risk to earnings.
Macquarie has also highlighted a few risks for investors to be aware of before snapping up shares. It adds:
Competition and new entrants in the US market, loss of key merchants, customer bad debt, additional capital, loss of KMP, technology, security, fraud, regulatory changes and reputational risks.
