Zip: Commoditized Nature Evident

We trim our fair value estimate on Zip ZIP by 5% to AUD 0.40 per share after lowering our projected transaction volumes. Price elasticity is notably high for a no-moat business like Zip. As the group continues to implement fee increases to bolster profitability amid rising interest rates, we expect this to adversely affect transaction volumes. This is due to the availability of alternative buy now, pay later tools and the looming prospect of a downturn in consumer spending. We retain our Extreme Morningstar Uncertainty Rating.

Slower volume growth is likely to more than offset the gains from higher fees, hindering the pathway for Zip to be net profit after tax-profitable in the next five years. This view was validated in Zip’s update for the first three months of fiscal 2024, where successive fee hikes in Australia and New Zealand have reduced customer usage and transaction volumes below our prior forecasts. This was despite Zip’s decade-long presence in Australia and its position as the second-largest BNPL operator here, behind Afterpay, implying its services are a commodity. Significant investments have previously been incurred to drive growth but alas have not established a loyal user network, as competitors also adopted similar strategies.

There’s also the risk of customer attrition in the highly competitive U.S. BNPL market, where Zip is a relatively late entrant. Here, an impending economic downturn is expected to diminish consumer spending, while fee increases and a greater discipline on cost growth may erode Zip’s value proposition to users. Despite growth in transaction volumes, the business seems to be increasingly dependent on a core group of high-frequency users, while overall customer numbers have been slowly decreasing since the second half of fiscal 2022.

However, Zip’s liquidity is improving, and it expects to deliver positive group cash EBTDA in fiscal 2024.