Zip's 25% selloff is overdone – Citi

The high-flying Zip (ASX: ZIP) experienced a sharp 25% one-day selloff last week after the company's Q2 earnings fell short of lofty analyst expectations. Given that the stock had surged more than 1,000% in just over a year, expectations were high, leaving no room for error.

Despite the miss, Citi analysts upgraded the stock from Neutral to Buy last Friday, citing strong growth in Zip’s US business, though they expect it to slow to 35% year-on-year in the second half of FY25.

2Q25 Summary

• Total transaction volume (TTV) up 24.8% to $3.4 billion

• Revenue up 20.5% to $269.4 million

• Revenue margin of 7.9%, down from 8.2% a year ago

• Cash EBTDA up 50.2% to $35.3 million

• Net bad debts approximately 1.5% of TTV (vs. 1.7% a year ago)

• Active customers up 1.5% to 6.3 million

  • US active customers up 6.2% to 4.22 million

  • ANZ active customers down 6.2% to 2.12 million

Although TTV met Citi’s expectations, second-quarter revenue fell short of forecasts by 4%, primarily due to a 6% miss in ANZ revenue and slightly higher-than-expected costs. The analysts also attribute this miss to overestimating the revenue margin benefit from Zip Plus and underestimating the impact of tighter financial conditions in early 2024, which led to a 9% year-on-year decline in receivables.

However, with receivables up 3% quarter-on-quarter and TTV rebounding in ANZ, Citi expects 1% year-on-year revenue growth in the second half of FY25.

Cost Concerns

The Q2 report highlighted a number of cost concerns, including:

• Opex growth accelerated to 18% year-on-year in Q2, driven by higher market costs during the holiday season

• Costs in the first-half were up 14% year-on-year, raising concerns as to whether or not it might accelerate further

Citi views the Q2 opex as seasonally high and expects cost growth to slow in the second-half of FY25. They forecast an 11% year-on-year increase, which is higher than the guidance of 6-9% due to foreign exchange effects.

Weaker Margins

Zip's net transaction margin (NTM) decreased to 3.6% in Q2, down from 3.9% in the prior quarter and towards the lower end of the company's two-year target range of 3.5-4.0%. This was largely driven by a decline in revenue yield and higher net bad debts in the US.

Citi forecasts NTM to improve to 3.8% in the second half of FY25, driven by:

• Seasonality, with revenue margin benefiting from revenue recognition of November/December TTV

• Lower bad debts in ANZ as arrears continue to decrease

• Lower funding costs in Australia, assuming a rate cut in February 2025

Earnings Revisions

Citi's upgrade to Buy was driven less by optimism about the announcement and more by the share price falling below its target following the selloff.

The analysts lowered their earnings forecasts for FY25-27 by 8-12%, citing weaker-than-expected ANZ active customers, softer revenue margins, and slightly higher cost growth.

From an earnings per share perspective, FY25 expectations were cut by 29%, from 4 cents to 3 cents, while FY26 and FY27 were lowered by 14% (7 cents to 6 cents) and 11% (11 cents to 10 cents), respectively. This highlights how the weaker quarterly result has had a ripple effect on future earnings expectations.

While analysts rate Zip as a Buy due to its strong US business and product expansion, the quarterly miss could create near-term headwinds for the stock — especially after its 1,000% rally over the past 14 months.