Zip Co share surge sparks speeding ticket as valuation soars

A surge in Zip Co shares has prompted a price query from the ASX over the massive increase in trading in the stock, as market observers debate the soaring valuations in the booming buy now, pay later sector.

Zip shares gained as much as 14.8 per cent on Tuesday and have now more than doubled since mid-January, as investors pile into the rival to market darling Afterpay. Zip shares were up 6.5 per cent to $13.48 in late afternoon trade.

Zip Co co-founder, Peter Gray.Credit:Louie Douvis

On Tuesday’s market valuation of about $7.5 billion, Zip’s value on paper was higher than some of the country’s best-known companies, including JB Hi-Fi, AGL Energy, Crown Resorts, and this masthead’s owner, Nine Entertainment.

The gains on Tuesday led to a price query, known colloquially as a “speeding ticket,” from the ASX, which asked if the company was aware of unannounced information that might explain the recent surge.

Zip said it was not aware of anything that explains the recent trading, but did note there had been “significant interest” in the buy now, pay later (BNPL) sector lately, pointing to previous announcements about its growth that were made in January.

Analysts and fund managers pointed out Zip’s share register was skewed towards retail investors, and also highlighted the recent market excitement surrounding BNPL providers, which are aiming to disrupt the credit card and personal loan businesses.

Morningstar analyst Shaun Ler referred to a January update on Zip’s strong growth performance in the United States, and to recent reports the company was seeking more US investors. “These two developments are making investors very excited,” he said.

Evans and Partners analyst Matthew Wilson, who has a $5.10 a share valuation on Zip, said: “Perhaps it’s consistent with the euphoria that we’ve seen with certain thematics globally.”

BNPL shares including Afterpay, Sezzle and Zip have taken off in recent months as investors bet on the growth potential of their instalment loan products, which have surged in popularity among younger customers.

Trading in Zip shares has increased dramatically in recent days, with its market capitalisation rising by $1 billion on Monday as its shares jumped by 16.9 per cent, following a 24 per cent gain across last week.

After a strong December quarter was revealed last month, co-founder Peter Gray argued the company was “significantly undervalued” compared with the revenue multiples of Afterpay and US-listed Affirm.

‘It’s pass the parcel time, as they say, but you don’t want to be stuck with the parcel when the music stops.’

Head of Australian equity strategy at Tamim Asset Management Ron Sharma, who is not invested in Zip, said its revenue multiple was still about half that of Afterpay, and the market appeared to be valuing the company relative to its peers. “These things can keep going as long as the leader in the space continues to trade at a high multiple,” Mr Sharma said.

However, value investors such as Investors Mutual investment director Anton Tagliaferro warn it is hard to justify the high share prices of BNPL operators. Mr Tagliaferro, who is not invested in the BNPL sector, said the frenzy reminded him of the dotcom boom and bust that started in the 1990s.

“One has to be extremely cautious playing the game now. That’s not to say they won’t go higher – there’s a lot of excitement in the sector,” Mr Tagliaferro said.

“It’s pass the parcel time, as they say, but you don’t want to be stuck with the parcel when the music stops.”

with Alex Druce

Most Viewed in Business

Source: Read Full Article