There's been a surge in the number of Americans choosing 'buy now, pay later' payment methods for their holiday shopping, according to the Financial Times.
Adobe Analytics estimates that BNPL contributed a record US$10.1 billion in online spending since the start of November, up 17% year-on-year.
This traction, coupled with growing expectations of interest rate cuts from the Fed in 2024 and the recent uptick in broader market risk appetite, has seen a powerful rally for BNPL names like Zip (ASX: ZIP) and the US-listed Affirm (NASDAQ: AFRM).
Citi upgraded its Zip target price to 51 cents (from 46 cents) with a Neutral rating on Thursday. The stock is currently up 15.5% at noon to 49 cents – a level not seen since mid-June.
"The key highlight from Zip’s recent trading updates has been the acceleration in US revenue growth while keeping loss rates low," the analyst said.
"We upgrade our cash EBTDA forecasts materially to reflect this and see upside risk to consensus. Zip has also made good progress on fixing its balance sheet and we expect it to be cash flow positive in 2H24e."
US growth is accelerating: The analysts note total transaction (TTV) volumes for Zip US rose 29% year-on-year in the first quarter of FY24, up from 14% growth in the fourth quarter of FY23 despite a quarter-on-quarter drop in active customers. This reflects increased use by existing customers.
Stable US loss rates: The above growth was achieved with loss rates being stable at 1.3% and below the company's target range of 1.5% to 2.0%. "We forecast loss rates to increase 1.5% in 2H24e and 1.6% in FY25e as Zip pivots towards growth in the US market. The key risk is that loss rates are higher than expected, especially when considering high interest rates," the analysts note.
ANZ loss rates expected to peak: ANZ transaction volumes and customer growth continue to be impacted by changes to risk settings as Zip focuses on reducing loss rates. Citi expects TTV to be down 4% year-on-year in FY24 but forecasts net bad debts to improve from ~4% currently to 3.3% in the second half.
For context, the ANZ region generated 51.5% of Group revenues (remaining 49.5% from the Americas) in the first quarter of 2024.
Upgrading earnings forecasts: "With Zip hitting profitability earlier than expected (1Q was cash EBTDA positive, CitIE: ~$6 million), we upgrade our FY24e cash EBTDA forecast from $6 million to $17 million and see upside risk," the analysts said.
There are a lot of parallels to be drawn between Zip and the US-based Affirm.
Here are some of the latest data points and commentary of interest:
9 November: Affirm beat quarterly revenue and earnings expectations. Revenue rose 37% to $497 million vs. analyst expectations of $455 million. Net loss per share of $0.57, above the expected $0.61 loss.
9 November: Affirm upgraded its guidance for the next quarter, with management noting "as our results show, we can deliver solid results even in a ‘higher for longer’ interest rate scenario."
29 November: Jefferies analysts upgraded the stock citing increased loan demand, improved funding conditions and better credit performance of its securities.
The final thing I want to note is the recent price action of both names.
Affirm experienced a sharp reversal on Wednesday. The stock finished 0.5% higher from a session high of 9.7% – is profit-taking finally kicking in after the outsized rally?
Zip sellers have finally eased. In the below chart, you'll notice numerous "gap-ups" that turned into significant fades. Some of the key moves include (vs. 20-day average volume):
24 October: Opened 13% higher, closed 6.7% higher on ~600% volume
3 November: Hit brief session high of 13.6%, closed 3.0% higher on ~400% volume
9 November: Opened flat, hit a brief high of 6.3%, closed 6.3% lower
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