Company To Leverage Stripe Partnership And New Products For Future Success

Key Takeaways

• Zip Co's U.S. expansion and partnerships are set to boost transaction volumes, aiding revenue growth.
  
• Balance sheet simplification and focus on innovation will enhance financial flexibility and profitability.
  
• Potential regulatory changes and geographical concentration risks in the U.S. could impact Zip Co's compliance costs, revenue, and profitability.

Catalysts

Engages in the provision of digital retail finance and payments solutions to consumers, and small and medium sized merchants (SMEs) in Australia, New Zealand, Canada, and the United States.

• Zip Co has significant growth opportunities in the U.S. market by expanding its Pay in 4 offerings and leveraging strategic partnerships like Stripe. This is expected to drive transaction volume (TTV) growth which will positively impact revenue.
  
• The introduction and scaling of new products such as Zip Plus in Australia, along with targeted vertical growth, are expected to increase customer engagement and merchant transactions, thereby enhancing revenue and net margins.
  
• Zip Co's strategic simplification of its balance sheet and removal of corporate debt provide financial flexibility, enabling it to invest in growth initiatives and potentially improve net margins by reducing interest expenses.
  
• Investments in product innovation and a focus on operating leverage are expected to drive efficiency and profitability, enhancing earnings margins over the next fiscal year.
  
• Zip Co is poised to capitalize on increasing consumer credit demand across ANZ and the U.S. with a diversified product range and sustainable growth model, potentially improving both revenue growth and net margins.

Zip Co Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zip Co's revenue will grow by 18.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.6% today to 11.1% in 3 years time.
• Analysts expect earnings to reach A$175.0 million (and earnings per share of A$0.11) by about August 2028, up from A$-44.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$72.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.9x on those 2028 earnings, up from -100.4x today. This future PE is greater than the current PE for the AU Consumer Finance industry at 13.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.33%, as per the Simply Wall St company report.

Zip Co Future Earnings Per Share Growth

Risks

• Potential regulatory changes in Zip Co's core markets could lead to increased compliance costs or changes in business operations, potentially impacting net margins and earnings.
  
• High reliance on the U.S. market for growth might expose the company to geographical concentration risks, where any economic downturn in the U.S. could affect revenue and overall profitability.
  
• While the company plans to maintain significant transaction volume growth, aggressive growth targets above market rates could come with increased credit risk, potentially affecting net bad debt and, consequently, net margins.
  
• The evolving interest rate environment and expectations for interest rates to decline may influence the company's funding costs and cash net transaction margins negatively if not managed properly.
  
• Operating in a highly competitive BNPL market, maintaining partnerships with major tech players like Stripe involves associated risks; any unfavorable partnership terms could affect Zip Co's revenue margin, especially in the face of strong market competition.

Valuation

• The analysts have a consensus price target of A$3.384 for Zip Co based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.31, and the most bearish reporting a price target of just A$2.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.6 billion, earnings will come to A$175.0 million, and it would be trading on a PE ratio of 38.9x, assuming you use a discount rate of 8.3%.
• Given the current share price of A$3.43, the analyst price target of A$3.38 is 1.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.