Shares in buy now, pay later (BNPL) provider Zip Co [ASX:ZIP] have been put in halt as the company announced a capital raise after impressive Q4 financial results.
The company’s stock has told an interesting tale in recent years, flipping from Aussie retail investors’ favourite meme stock to scorned pariah — now down 90% from its 2021 highs.
However, Zip and other BNPL stocks could be making a comeback as traders anticipate interest rate cuts and an easier capital environment in the future.
For now, Zip investors will have to wait until the shares come out of a pause tomorrow as the company raises $267 million to pay down debt.
Before today’s pause, the stock had seen incredible gains of 273% in the past 12 months, trading at $1.60 per share.
However, that’s still a far cry from its 2021 highs of $12.50 per share. So, are there any clear signs that Zip and the wider BNPL sector are making a comeback?
Source: TradingView
Capital Raise and Investor Confidence
Rolling on from a strong performance, Zip has used the breakout quarter to unveil a capital raise to help retire its corporate debt facility early.
The move to strengthen its balance sheet at this moment may annoy some shareholders. But the move should be considered in the context of renewed interest in the space.
Zip and other BNPLs have seen trading volumes and share price values climb again as people consider what is beyond the current high interest rate environment.
Zip’s shares have seen over 40% higher trading volumes in the past year as it starts to see inroads into its US market push.
But overall, the quarter was a strong one for Zip. Here are the highlights from its most recent quarterly results:
- Transaction volume (TTV) reached $2.6 billion, up 19% compared to Q4 2023
- Revenue climbed to $223.6 million, a substantial increase of 22.1% versus Q4 2023
- Transactions totalled 19.7 million, up 8.8% from Q4 2023
- The number of merchants on the platform grew to 79,300, a 9.6% increase from Q4 2023
These results highlight Zip’s recent success in expanding its market penetration in the competitive BNPL space.
The biggest part of this has been the US market, which has turned from its problem child into its growth engine once again.
Revenue in the Americas (including Canada) was up 46.8% in the June quarter compared to the same period last year.
Transactions there also saw a similar jump in percentage terms — but surprisingly — this was from relatively small user growth.
The number of active customers saw only a 1.4% increase over that same period, showing that it is building each customer’s value over raw user growth.
In fact other BNPL have been seeing similar increases in customer values in this period. Similar hopeful signs were seen in customer default rates.
Many people had originally turned off these stocks because they feared higher default rates as interest rates began to rise.
In its latest quarterly report, Zip showed that its Net bad debts were reversing, falling to 1.4% from 1.9% in 4Q23.
Zip CEO and Managing Director, Cynthia Scott said today:
‘In another strong performance, the team delivered its fourth consecutive quarter of positive Cash EBTDA. As a result, underlying Cash EBTDA for the full year is now expected to be in the range of $77m to $80m, a $125m-$128m turnaround on the Underlying Cash EBTDA loss of $48m in FY23.’
On the back of this positive quarterly the company has halted for a $273 capital raise.
The first tranche will consist of $217 million in fully underwritten shares, and the second will consist of $50 million in a non-underwritten share purchase plan for eligible shareholders.
Is this a turning point for Zip Co, or will the stock’s momentum fade once the excitement settles?
Outlook for Zip Co and the BNPL Sector
For current Zip shareholders, today’s capital raise may be slightly frustrating after a challenging few years.
While the share price is likely to slip after the trading halt, considering its stronger trading volume, it could see a new round of retail investors ready to join again.
So should you be one of them?
In short, I would probably urge caution for new investors in the BNPL space and Zip Co.
While there have been some clear signs of recovery from BNPL platforms, they still come from a very low base level.
So, while it is very positive to see higher values for each Zip customer on its platform, the total active customers actually fell by -2.9% to 6 million.
Similarly, while their Net bad debt figures fell, there are still pockets of weakness. Australian customers, for example, saw their bad debts climb to 4.7%, the second-highest number since June 2022.
Investors should also consider the broader context of the BNPL sector.
The BNPL industry has faced increased regulatory scrutiny in recent years and is now seeing growing competition from traditional financial institutions in the same space.
Nevertheless, Zip’s strong Q4 results suggest significant growth potential in the market.
It is certainly worth noting that Goldman Sachs underwrote the stocks for its latest raise. While big-name institutions filled the question time on the latest earnings call.
It seems Zip co and BNPL have come back into fashion.
Maybe the potential for a lower interest rate environment has brought them back into vogue; maybe it’s just a matter of timing.
As consumer spending habits evolve, particularly among younger shoppers, BNPL services like Zip may see sustained demand.
However, investors should be mindful of potential regulatory and competition headwinds before jumping behind Zip or its ilk.
Finding the Next Disruptors
While Zip Co’s recent performance is encouraging, savvy investors are always looking for the next big opportunity in the Tech space.
But finding AI plays in the ASX is challenging at best, with many of the trades overcrowded and overhyped.
At Fat Tail, we’ve been researching to identify some of the most promising AI disruptors that could disrupt the market.
Our small caps expert, Callum Newman, has identified five stocks that he believes have the potential to be Australia’s AI boom.
While we can’t guarantee they’ll see the same kind of surge as Zip Co, these companies could be at the forefront of the next wave of AI for Australia.
Click here to learn more about the Five AI stocks and our AI roadmap for the ASX.
Regards,
Charlie Ormond
For Fat Tail Daily
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