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Why Zip Co Is Up 9% Yesterday?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Zip Co (ASX: Z1P) rallied 9% yesterday on no news, making it the top performer on the ASX 200. This rally shows just how strong the uptrend in buy now, pay later providers are, as markets continue to digest recent positive news in the sector.

One recent piece of news is a capital raising conducted by NAB. This capital raising allowed the company to continue to lend money out to their clients, enabling the company to continue executing on its growth strategy. The deal increases confidence in the institution, since banks have rigorous credit approval processes on such large loans. Nevertheless, since it was announced a few days ago, it was already in the price. As such, while it contributed to Zip Co’s 250% share price rally over the past year, it was not the sole reason for the rally yesterday.

ZIP CO - Report.
Zip Co is up 250% this year on the back of successful execution (Credit: Peter Alexander)

Another reason for their rally is their recent annual results. The company has $84.2m in revenue and has recently achieved positive cash EBITDA. The ability to turn a profit has concerned some analysts of the buy now, pay later space, who fear that a market share grab will make it hard for companies to monetise their customer base. Unlike Afterpay however, Zip Co also provides longer term loans for which it does charge interest. This means that one part of its business has competitors that are profitable, meaning that profitability is less of a long-term concern for Zip.

One recent development in the business driving the rally is their acquisition of PartPay. The PartPay acquisition will help the company diversify into new geographies like the UK, US and South Africa, giving Zip easy access to the company’s base of more than a hundred thousand customers. International expansion was the main driver of Afterpay’s (ASX: APT) rally from $5 to over $25 today, so it is clear why investors are excited about the development.

Having started much earlier, Afterpay has a head start on Zip Co in offshore markets, so it remains to be seen how quickly Zip Co gains traction. If it does however, the potential for a multiple re-rate is appetising. Investors who are confident in Zip Co’s management and their ability to execute on the company’s international expansion strategy would do well to keep the business on their watchlist.

FlexiGroup (ASX: FXL), and Afterpay (ASX: APT) are also operating in the buy now, pay later space and represent a significant competitive threat to Zip. The prevailing view amongst investors in the sector is that the industry can support a few core businesses, which will develop competitive advantages from having a large amount of customer data from which credit models can be continually improved. The companies that are the most efficient at this process will be more attractive to merchants, given they can reduce fees through minimising losses arising from customer defaults.




This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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