Zip Co Limited (ASX:Z1P), a consumer finance company based in Australia, saw a double-digit share price rise of over 10% in the past couple of months on the ASX. As a small cap stock, which tends to lack high analyst coverage, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s examine Zip Co’s valuation and outlook in more detail to determine if there’s still a bargain opportunity. See our latest analysis for Zip Co
Is Zip Co still cheap?Zip Co appears to be overvalued according to my relative valuation model. In this instance, I’ve used price-to-book ratio (PB) ratio given that there is not enough information to reliably forecast the stock’s cash flows, and its earnings doesn’t seem to reflect its true value. I find that Zip Co’s ratio of 6.51x is above its peer average of 2.27x, which suggests the stock is overvalued compared to the Consumer Finance industry. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that Zip Co’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.
What does the future of Zip Co look like?Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations. In the upcoming year, Zip Co’s earnings are expected to increase by 51.08%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? It seems like the market has well and truly priced in Z1P’s positive outlook, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe Z1P should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping tabs on Z1P for some time, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for Z1P, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Zip Co. You can find everything you need to know about Zip Co in the latest infographic research report. If you are no longer interested in Zip Co, you can use our free platform to see my list of over 50 other stocks with a high growth potential.