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Zip Co (ASX:Z1P) - Founders Peter Gray (left) and Larry Diamond (right) - The Market Herald
Founders Peter Gray (left) and Larry Diamond (right)
Source: Sydney Morning Herald
  • Afterpay's (APT) meteoric rise is a story many ASX investors are familiar with, but can buy now, pay later competitor Zip Co (Z1P) share in its success in 2021?
  • In January 2020, Zip was trading at $3.38 and still managed to double its price during a pandemic, jumping to as much as $8.55 in August
  • Last year, Zip's headline announcement came after it bought the remaining shares in QuadPay for $403 million, giving it access to the world's biggest retail market
  • FY21 has already proved fruitful for the fintech stock, which broke records in the first four months of the current financial year
  • This year, Zip is looking to make a mark in the U.S and U.K., while also expanding its Australian market
  • At the end of trading today, Zip is up 6.14 per cent and trading at $5.53 per share

2020 was a tough year for most, however, it was a prospective period for buy now, pay later (BNPL) stocks.

But just what is all the fuss about surrounding BNPL? Essentially, the platform's interest-free schemes are changing the way people pay. The payment option allows people to buy something without having to pay for it until a later date.

Leading the BNPL pack in Australia is Afterpay (APT), whose shares skyrocketed from $30.55 on January 6, 2020 to a whopping $113.99 just over a year later.

However, there's more than one horse in the BNPL stable — Zip Co (Z1P), is well and truly in the race as the second-largest BNPL company in Australia.

Zip was trading at $3.38 before the pandemic and went up to as much as $8.55 on August 24.

So what made Zip more than double its share price in one year, and will it keep rising in 2021?

2020

Last year, Zip's headline announcement came after it bought the remaining shares in QuadPay for $403 million, giving it access to the U.S.: the world's biggest retail market in June.

QuadPay is a New York-based fintech and is one of the largest BNPL platforms in America.

The U.S. retail market is currently worth over US$5 trillion (nearly A$7 trillion), which is more than 15 times the size of the Australian market.

However, as Zip's total customers, retail partners and transaction volumes rose over the year, so did its operating costs. When taking into account with its operating and acquisition expenses, as well as other costs, Zip recorded an adjusted loss before tax of $44.9 million.

And while it's still operating at a loss, Zip has already enjoyed a positive start to FY21, breaking records in the first four months of the current financial year.

In its November business update, Zip reported $96.7 million in revenue from the start of July until the end of October — a 91 per cent increase on the same time period last year. Of this figure, $27.6 million of BNPL revenue came from just October alone.

More recently, just before Christmas, Zip announced a share purchase plan (SPP) to raise $30 million. At this stage, shares will be issued at $5.34 each, but this figure could change depending on its share price closer to January 13.

The money from the SPP will be used to fund Zip's growth in the United States and the United Kingdom.

Over the next year, the company plans to grow its business in the U.S., U.K., and new markets, while also expanding in Australia.

Is Zip a buy?

As more people are shopping online, credit cards are becoming a thing of the past. Zip CEO, Larry Diamond, said in a Eureka interview that people are using a Zip account as a digital wallet as opposed to a credit account.

"They're gravitating towards interest-free terms and they do that at the retail checkout. Once they have the account, what they find is they actually start to fall in love with the account and use it more regularly," he said.

When asked about Afterpay, Larry said he does not like to compare Zip to its competitors, but did say both companies are tracking well.

"We continue to believe that there is still an enormous growth ahead just in the Australian market and that's before we start to look overseas," he concluded.

However, there is another competitor which recently emerged in the booming BNPL sector: PayPal has now launched Pay 4, its version of BNPL.

Analysts from Bell Potter have pointed out that PayPal, which has a US$229.5 billion (around A$295 billion) market cap, is a sizeable rival for Australian firms to contend with.

Bell's market analyst Jessica Amir believes PayPal's dominant position in the market and its existing network of retailers is a real concern for BNPL groups.

"Having a major international player shake the buy now, pay later tree is definitely going to cause some leaves and branches to fall," she said.

"[PayPal] has a highly profitable international network that it just needs to educate to roll out its offering to," she added.

But Jessica has pointed out that the Australian market is unlikely to be affected by PayPal's news — at least initially — and she believes that BNPL companies in Australia can go the distance.

Whether this will hinder Zip's growth, or cement its path to victory, remains to be seen.

At the end of trading today, Zip is up 6.14 per cent and trading at $5.53 per share.


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