Afterpay Touch Vs Zip Co

Tim Boreham

Independent Investment Research

Which of the ‘buy now, pay later’ providers offers the best value and upside for investors: Afterpay, Zip, or neither of the above..?

The rise of Afterpay (APT, $24.80) from obscurity to a circa $6 billion market cap entity has been widely documented, but less so Zip’s emergence from a fintech thought bubble to an entity valued at $870m (Z1P, $2.50).

Predicated on making money from merchant fees and late payment fees from consumers, the duo’s models differ but are pitched at millennials without access to – or suspicious of - traditional credit.

Both stocks recent escaped surprisingly unscathed from a Senate inquiry – ominously probing “credit and hardship” - that some pundits feared would torpedoed their retail point of sale models.

Instead of upbraiding the providers for leading our youth into debt-tation, the pollies recommended the providers take the customer’s ability to repay into account (which we hoped they did anyway).

The companies’ half-year results show their customer and merchant takeup are growing strongly, but both are still loss makers.

Afterpay reported half-year revenue of $107.1m (up 124 per cent) on underlying sales of $2.3bn (up 147 per cent). Year on year, “active customers” grew 118 per cent to $3.1m.

Afterpay also reported ebitda of $11.5m and a statutory loss of $2.2m.

Broker Bell Potter forecasts full-year revenue of $210m, $14m of ebitda and a loss of $43m.

Zip meanwhile grew its interim revenue by 114 per cent to $34.2m, off a sales base of $495m (up 110 per cent). Customer accounts doubled to 1.02m.

The company lost $6.8m at the ebitda line and $6.8m on the bottom line.

Broker Morgans estimates $84m of full year revenue, a $5.5m ebitda loss and a bottom line deficit of 410.7m.

While it would be nice to see some black ink sooner, both are investing heavily for growth.

In Afterpay's case, it intends to spend $20m in the full year, mainly on creating a US beachhead. Having signed up 700,000 active customers, management expected to have one million by the end of March

This month Zip raised chunky $43m in a placement, at $1.53 a share (an 8.9 per cent discount). The funds will be used to support a New Zealand expansion and buttress negotiations for a new debt facility with backer Westpac.

Zip has two key products, Zip Pay and Zip Money although both in effect are lines of credit. The former targets purchases below $1000, while the latter targets chunkier items valued at up to $30,000.

The models work not by levying interest, but by charging merchant fees and late fees on customers. Afterpay says less than 20 per cent of its revenue comes from late fees, while Zip protests that only one per cent of its customers are tardy with repayments.

Afterpay charges merchants 30c per transactions, plus a 4-6 per cent commission.

Zip Pay levies 15c per transaction and a 2-4 per cent commission.

While Zip undertakes credit checks, Afterpay screens customers with an algorithmic assessment based on the type of purchase and the gender and age of the customer.

With one-third of Afterpay’s revenue and only one-seventh of Afterpay’s market valuation, Zip offers the best value on the raw metrics.

But the true value of the companies only will unfold over time as they demonstrate whether or not they can achieve meaningful scale while avoiding customer attrition and bad debts.

Afterpay’s extravagant valuation assumes success in the $6 trillion US retail market which, less face it, is a tad more enticing than the Kiwi market targeted by Zip.

The willingness of merchants to forego a cut of sales for the privilege of winning sales is also a key factor.

Afterpay claims a base of just over 23,000 “active merchants’, while Zip claims 12,600 “retail partners”.

Raiz Invest (RZI) 54c

Formerly known as Acorns, Raiz is the prudent antidote to Afterpay and Zip Co in that its savings app encourages younger consumers to save rather than spend money they don’t have.

(As a sideline, Zip also has a budgeting tool called Pocketbook).

Having established its early-mover presence here, Raiz is now tackling the Indonesian market as the first leg of its stated intention to enter Asian markets.

The appeal is understandable, given 55 million of the archipelago’s populace of 267m is in the consumer class (that is, people who spend on other than the life’s essentials).

This cohort is expected to swell to 140m within eight years. It’s also digital savvy and receptive to downloading apps. “The propensity to save is a lot higher than Australians, which is not unusual for Asia,” says Raiz chief George Lucas.

“At the same time they have skipped PCs and gone straight to mobile with e-wallets and the like. They’re also big social media users, which suits us perfectly.”

The product works by rounding up the cost of a small item, such as a $4.50 cappuccino to $5. The surplus 50c is fractionally invested in an exchange traded fund once the balance reaches $5, with dividends accumulated proportionately within the account.

Raiz makes its money by charging a flat $15 a year fee on accounts below $1000 and 27.5 basis points on balances higher than that.

As of March end customer funds stood at $300m, with an average balance of $1298 (unlike conventional savings product, this balance fluctuates with the market movement of the ETFs).

Raiz is showing good momentum, having signed up 660,000 users -- 186,000 of them active – as of the end of March. Funds under management stood at $300m, including $37m in a superannuation product.

In Indonesia Raiz plans to get to one million customers within three years, although its fees will be lower relative to Australia.

Then there’s the ‘but’: with Raiz shares taking 72 per cent since listing in June last year, investors have severely depleted their bikkie tins. At the time of writing 18.3m shares – 27 per cent of the register -- were coming out of escrow and that could further pressure the stock.

While Lucas says the market is what the market is, it doesn’t help that Raiz continues to make losses: a $3.4m deficit in the December half compared with a $300,000 loss previously, on revenue of $3m (up 30 per cent).

Lucas argues that Raiz presents investor value relative to the ‘buy now, pay later’ schemes: Raiz’s market cap ascribes a value of $200 per customer, compared with $3000 for Afterpay and $1000 for Zip.

(We make it $1500 for Afterpay and $568 for Zip, but we get your point George).

Lucas accounts for 10 per cent of the Raiz register and Acorns of the US holds a further 8 per cent.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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