Zip Co Ltd (ASX: ZIP) shares dropped sharply last week after the company announced a trading update and are down about 60% over the past 12 months.
The analyst teams at both Macquarie and UBS believe this has created a strong buying opportunity, and have released new research on the company with very bullish share price targets attached.
I'll get to the specifics of those shortly.
First, let's have a look at what the company announced.
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Underlying business growing strongly
ZIP last week said its total transaction volume (TTV) for the first quarter grew to $4.6 billion, up 18% on the same quarter the previous year.
Total income was 17% higher at $376.1 million, while net bad debts increased from 1.65% of TTV to 1.97%.
Zip Chief Executive Officer Cynthia Scott said it was a strong result.
She said:
Customers are choosing to use Zip more often, driving strong top line growth, with transactions per customer up 27.0% in the US and 14.2% in Australia, positioning us well ahead of the second-quarter holiday season. In the US, TTV and revenue grew 34.1% and 32.0% year on year respectively (in USD) from an increasingly larger base. We continue to expand our US offering, with Zip Cash set to launch to select customers over the holiday season. In Australia, we achieved solid momentum with receivables growing at a double-digit rate year on year.
Ms Scott said the company reiterated its full-year EBTDA guidance of $340 million, up 26% year on year.
There was also a fraud issue in the US that resulted in $10.1 million in costs for the company.
Brokers think Zip shares are looking cheap
UBS said in its research note that higher-than-expected bad debts and the fraud were the key concerns out of the quarterly.
But they said they were "comforted" that the second quarter should show improving momentum.
UBS lowered its earnings forecasts for the company, reflecting slower TTV growth in Australia and New Zealand and a slight lift in the medium-term bad debts ratio.
They added:
We reiterate Buy despite our lowered forecasts today as we see the stock down 30% an overreaction, given structural growth tailwinds in the buy now pay later sector. Zip is trading on 11x forward Price/Earnings which we view attractive for high teens earnings per share compound annual growth rate.
UBS has a price target of $4.05 on Zip shares, compared with the current price of $1.52.
Macquarie has a price target of $3.50 on the shares.
They said the fraud appeared to be a temporary earnings headwind rather than a structural issue, and "our rating continues to be underpinned by Zip's strong growth prospects and attractive unit economics''.
Zip is valued at $1.82 billion.
