Initiating Coverage of Zip at AUD 4.50 FVE; Buy at Margin of Safety to Avoid Paying the Price Later

We initiate coverage on Zip with a fair value estimate of AUD 4.50 per share and no-moat, very high uncertainty, and Standard stewardship ratings. As an early Australian buy now, pay later operator, Zip has exhibited stellar growth. Since fiscal 2017, transaction volume, or TTV, and customer numbers roughly doubled each year to around AUD 2.1 billion and 2.1 million, respectively, at the end of fiscal 2020. Unlike Afterpay, its Zip Pay and Zip Money products cater to a broader mass of customers as they have greater repayment flexibility, financing limits, and variation in merchants. Recent acquisitions of QuadPay and PartPay materially expand Zip’s addressable market and allow it to scale its business faster. In addition, Zip has a Pay Anywhere function that lets customers use its products at any retailer--a differentiation to Afterpay’s merchant partnership strategy.