Direct From the Desk: A deep dive into Zip Co

In the fifth episode of 'Direct from the Desk', analyst Jono Higgins and I take a deep dive into Buy Now Pay Later juggernaut Zip Co (Z1P).

If you had bought Zip, the silver player in the Buy Now Pay Later space, in March 2020, during the COVID market lows, you would have been met with a stellar return of almost 470%. But unfortunately for those lucky investors, 2021 has been more of a rollercoaster. Zip's share price has been nothing but volatile as we saw shares range from highs of $14.53 to lows of $6.32, just in the past year. 

This podcast discusses:

• An overview of the business and what it does
• The main differences between Zip and Afterpay
• The growth path for the sector and Zip in particular
• Where funding for the business comes from
• Timeframe around forecasted growth 
• Potential M&A in the sector
• Key metrics to look for in BNPL stocks quarterly reports
• Main risks to flag
• Jono's assessment of Management

If you missed episodes 1-4, you can access them here:

• In episode 1 we looked at small-cap consumer finance business Wisr (ASX:WZR), 
• In episode 2 we discussed software business Altium (ASX: ALU) which has since attracted a takeover bid  
• In episode 3 our stock in the spotlight was shipbuilding company Austal (ASX:ASB).
• In episode 4 we took a deep dive into Oz Minerals (OZL), Australia's premier copper focused miner with a global footprint

Access Market Matters' insights

We hold Z1P in 2 of our portfolios and it is a really strong growth story in our minds. For more insights on other stocks we like, click here to take a free trial today.

Edited Transcript

Hello, and welcome to Direct From the Desk produced by Market Matters, a podcast that takes a deeper dive into a stock, a sector, a theme, or an event that we think you should be across. I'm James Gerrish, portfolio manager at Shaw and Partners, and the author of online investment site marketmatters.com.au. We run real portfolios, we invest in them, and we write about our views, experiences, and our portfolio decisions. To take a free 14-day trial of Market Matters, visit marketmatters.com.au

Today's podcast is the fifth in a six-part series, doing a deeper dive into six stocks that we like. We either own them, or we're looking to buy them. Before we crack onto today's episode, it would be remiss of me not to remind listeners that any advice provided today is of a general nature only.

One of the fastest-growing companies listed on the ASX will feature in today's episode, following consumer finance business Wiser in episode one, software business Altium in episode two, shipbuilder Austel in episode three, and copper miner Oz Minerals in episode four. And to join me this week on the journey is analyst at Shaw and Partners, Jono Higgins. Mate, thank you very much for joining me.

Jono Higgins:

Perfect. Thanks for having me, James. I look forward to discussing Zip.

James Gerrish:

Well, there you go. You've stolen my thunder. So ZipCo is this week's stock that we're going to cover. So ASX-listed buy now pay later company. Currently has a market capitalization of around $4 billion. Volatility is something that springs to mind when we think about Zip. It's something you need to be comfortable with if you're considering buying Zip shares.

Over the last 12 months, the shares have gone from a high of $14.53, which happened around February from memory to a low of $6.32 in May. The share price currently sits just above $7 at the time of recording. So I thought, Jono, we'd start with a quick overview of the business for those who perhaps might not be familiar with it.

Jono Higgins:

Yeah, great. So let's look at Zip first just in terms of what the business does. Look, the reality is Zip is one of the pioneers in what we call the BNPL or the buy now pay later space. So effectively what they do is they offer a range of products and Zip has a very wide range of products, but they offer a range of products across interest-free digital wallets and paying for type products.

So they have a wider product range than Afterpay, which is probably more widely known. Afterpay offers a four split payment model. Zip also offers the four split payment model, particularly in international markets, but they also offer a number of other digital credit type items. So they offer you a traditional interest-free period, think larger ticket items, and they also offer a short-term revolving credit around a wallet type functionality.

Their products, you can use them anywhere pretty much now. They've got functionality that integrates through a mobile wallet or a virtual card, both internationally and domestically. And they're located across four primary markets being the US, New Zealand, Australia, and also into the UK, whilst they're expanding into Europe, Canada, and parts of the Middle East and Southeast Asia over time. So they're a truly global payment player. They're probably the number three or number four in terms of size in the US and they're growing fastest there. And in Australia, they are number two in terms of customers to where Afterpay isn't still growing really strongly here.

James Gerrish:

You just made mention of Afterpay a couple of times there. So these guys came up with the buy now pay later idea. They rolled it out first, the pay in four. So Zip has obviously built on that idea and carved out a niche for themselves. Can you just talk about the main differences between Afterpay and Zip? You touched on the range of products, the size of credit being offered, the different channels a consumer can go down, but can you simplify that out, say Afterpay versus Zip.

Jono Higgins:

Yeah, look, and they differ across a range of different metrics, so let's just run through them really quickly. So Afterpay is an extraordinary business and it's got an extraordinarily simple business model. So their business model is that you pay for an item in four split payments. The first comes on the first day, and then it's three fortnights afterwards after that product. So they split it into equal payments. If you miss those payments, then you have a late fee and they stop approving you for further credit. That's Afterpay. So they're making 4% merchant fees on a transaction and they're making 2% net margins and they rotate that about 12 times a year. So they make something like 20% plus net interest margins. You compare that to a traditional bank, they make about 2% per annum.

James Gerrish:

Okay, so just nutting that out a little bit further. So the margin, so the listeners can understand, the margin is the difference between the cost that Afterpay's borrowing money at and effectively what they're charging the retailer to have the Afterpay product. They get their net interest margin so high because they recycle capital so frequently. So it's over a six-week period that they're recycling capital. So that just talks to how they generate such a pretty impressive margin relative to say banks, et cetera, which are longer-term credit.

Jono Higgins:

Yeah, correct. That's why the market's really taken off behind it. We'll talk about margins in a little bit, but it's a highly simple product in terms of the consumer experience. It's just a couple of clicks to sign up. And if you go afoul of the product, you stop using the product effectively.

Now, if I compare this with Zip, Zip has what I'd term as being a wider construct or product platform. So Zip uses credit checks, it looks at bank account details. It's another click or two more than what Afterpay does, but they do look more at your financial position, your literacy and what you might be able to be approved for.

Essentially, they have a number of different products, but there are three key products. The first is their paying for the product. So this is in their international markets. I think that's exactly the same as Afterpay, just with some higher yields, because in international markets, margins are higher, but it's effectively the same returns, same product. That product's taking increasing share with Zip.

The second product is a product called Zip Pay. Effectively that's for less than a $1,000 or $2,000 purchases. You can be flexible in what you do, but it's geared towards repaying less than six month periods.

And then you've got Zip Money, which is their first product, but which is essentially an interest-free period designed for $2,000 plus purchases, think like large TVs, JB Hi-Fi, Harvey Norman-type purchases. And that can be anywhere from a three to 24 months plus interest-free type product where you don't pay anything, you pay an account fee during the period. And then after the period's finished, then you pay an interest fee similar to a credit card at 19.99%.

Now, we won't try to confuse people too much, but essentially in the core Zip products, they're are Australian products, being Zip Pay and Zip Money, they aim to make an effective yield of about 18% per annum on the receivables. They look to rotate that twice a year, and they look to make a net interest margin over the course of a full financial year. So not per transaction, but over a full financial year of about 10 to 11% per annum, which compares with Afterpay at say 20, and it compares with banks at say two. So they've got about half the effective margins in their domestic business and then their international business, which is now taking over 50% of volumes. I'm sure we'll get into in a moment. That business is rotating extraordinarily quick, similar to Afterpay, and they're making those north of 20% net interest margins on an annualised basis.

They have a very wide range of products. So small receivables, big receivables versus Afterpay, which has a very... It only has one product, but it's been highly effective in gathering significant momentum in the market. What we saw with Zip was that Zip originally launched... So Zip and Afterpay launched at a similar time. Zip probably had more credit checks and stuff at the start, and they had a longer duration receivables. And then they've seen the success that we've seen with Afterpay through the shorter duration for split payment option. And they launched Zip Pay, which has been an extraordinarily successful option for them, but it does differ slightly to Afterpay.

James Gerrish:

I was on a call and I think you were on this call as well with management a little while ago. One of the questionings was where the growth is, and we'll get into growth. But I think the team framed Zip is an alternative way to pay for things, a broader range of things, a digital wallet if you like. That then can plug into a lot of different areas around payment ecosystems. So it's not just thinking about it as this buy now pay later company. It's obviously going to feed into this changing payment structure that the world is moving to. So less cash, more alternative payment ecosystems.

Jono Higgins:

Look, that's right. And our view on why the sector has done so well in general. And it's not just here in Australia, but it's also taking off in the USA, the UK and Europe with Klarna, a recent company in Northern Europe. Just done a valuation at $64 billion, which is going to be listing on the NASDAQ in the next 12 months, demonstrates the appetite outside of Australia. It's not just here, it's everywhere. And the reality is we think it's because of origination. So in general, Australia was a great and fertile breeding ground for these types of companies because we have a very oligopolistic nature to our banking system. So we've got four major banks. People don't like moving. Credit card fees have not come down ever. People are still getting charged 19.9% on credit cards when the cash rates have gone to zero. In the US, it's more like half of that with the competition. And origination. Origination is the key. It'll take you, call it weeks and months, to get approved for a credit card or any financial product of that nature. And then they'll charge you a lot when you do it.

So if you compare that to Zip and Afterpay, and some of these other newer entrants, the reality is that they can look for better information, analyse that information, and they can do it in real-time or two to three minutes, and you can get a decision. So the mainstream banks just cannot keep up with this sort of iteration. And there's an advantage for these FinTech players and we're seeing them start to roll that out globally.

So our view on the sector is that there's an origination issue for the traditional financial players. These fintechs are somewhat fixing this problem. And with Zip in particular, you talked about digital payments and the digital wallet. Look, as soon as you're in the ecosystem, you've got a number of different lending products. You've got personal financial management products. As soon as you're in there, there are over six and a half million customers that Zip have at the moment. You could be offered things like stocks, you could do crypto, you could do home loans, car loans, whatever it is. It doesn't matter. Zip and Afterpay have effectively been paid by the merchant to take these clients in that they've been paying a merchant fee. These companies have actually been paid to acquire customers, and that's just a highly effective model over time if you're able to take those customers and then move them on to other product constructs outside of BNPL.

James Gerrish:

Okay. You spoke about Australia and the market that Australia, a reason it leads the way in buy now pay later. Overseas expansion is obviously the key to growth moving forward for both of these. Well, for Zip as well as the rest of the sector. Can you talk about Zip, what they are in Australia versus what the opportunity set is going from an international standpoint? So they've obviously bought Quadpay in the US. They've obviously made a number of other acquisitions internationally. Can you speak about where that growth is going to come from relative to the Australian business?

Jono Higgins:

Yeah. Look, and I think that's right. I think the core thing to also emphasise for listeners is that Australia is still a fast-growing market for all the major providers. We're going to talk about the wider opportunity in what we see as being a very blue ocean out there. But the reality is that I think Zip's still growing 40 or 50% year on year, and they've been in Australia now for nine years and have over two and a half million customers in Australia. So what we've seen in Australia, just to evidence the international opportunities, we've seen buy now pay later companies take about 30% of customers in Australia, and then they've been rolling out over more and more checkouts and still generating substantial growth. So they've done that within six or seven years from a proper launch. And if we look over at the US and other international markets, obviously we've got significant multiples in size of the opportunity.

So the US has significantly higher online penetration and there are economies like California, which are larger than what the entire Australian market is. So the US has a massive opportunity. Europe's a massive opportunity. Southeast Asia, a massive opportunity. If we take the US, I think the major BNPLs have been in operation in the US for probably three or four years in terms of the Australian ones. Probably less when they've actually been in the market. So we're talking more like three years from when they've started to commercialise. Penetration there has gone from zero up to seven or 8% of the population within a very short period of time. And it's tracking ahead of what we saw in Australia. So we're seeing an accelerated pathway towards adoption in the US in what's a very, very deep market, and it's why we've seen a whole bunch of international appetite coming out of competitors.

We've seen PayPal halfway through to calendar year 2020 launch a product. We've seen Klarna expanding. Affirm was a recent IPO that doubled in listing at the start of calendar year 2021. And we've seen a whole bunch of different companies talking about launching products. And the reason is because they can see, touch, and feel these. So if you look at Zip, I think I'm modelling about 50% of the revenues this year coming from the international opportunity, predominantly through their subsidiary, which is the business name Quadpay that they acquired in July last year. That business only started three years ago to evidence that opportunity to the listener subset. And that's already a very large business that's third or fourth biggest in the US. It's growing 250% a year. And it's annualizing close to over 200 million in revenues. So still a lot to go in our view.

James Gerrish:

All right. So they're finance businesses. So they obviously need capital to grow, to finance a larger book. How do they fund their operations? And how does that look as growth intensifies from here?

Jono Higgins:

Yeah, they're highly effective as financing businesses in terms of how they actually fund the growth. So I'll just step through it, which we'll touch on in a moment. But look, essentially these guys fund the majority of their book through a lending arrangement or a debt arrangement that they have through off-balance-sheet vehicles, which are owned by debt investors. The BNPL companies finance really 95 to 97% of a receivable through debt funders and about 3% of its equity. That's the receivables side of things. And then they're investing ahead of the curve. So all these businesses are experiencing some extraordinary growth, and extraordinary growth requires investment ahead of the curve. They're making really strong gross profit margins, and then they're investing most, if not all, of that gross profit below the line, and then some to then generate the return.

What we have seen out of the sector is that typically the sector participants are raising capital probably once a year in terms of equity capital. We're seeing that being pushed into predominantly the overseas function. Both Afterpay and Zip are profitable inside of their Australian operations where a lot of the costs sit. Then when they're opening up in new markets and they're accelerating at extreme growth rates, they're doing it with equity that's come from a range of sophisticated investors that range from private equity firms up to venture capital and also just regular type investors.

So that's been reasonably highly sought after in the long term. But the reality is we have seen the sector tap the market in the last 12 months, which has just caused some indigestion. So Zip itself has tapped the market twice during this financial year. We don't see any immediate names for that group to be funding itself in the future with new issuance, but it's probably been the one knock on the sector and it's in regards to the capital intensiveness.

When we look at financial companies, the reality is that these are businesses that require capital to grow, and they require both equity and debt. It's just that they are financing themselves more effectively than what a traditional financial institution is. When we did mention earlier that they can revolve their book significantly higher than if you think about a mortgage book rotates on a 20 year period, these businesses are rotating multiple times a year, so they don't require the same level of equity, but they do require equity, and that in the short term, it held the sector back, I think, in the face of just some multiples contracting.

James Gerrish:

All right. Let's move on to the growth side of things. I was just looking back and having a look historically at what Zip has done. So at the end of 2017, they're listed about four years, or they started the business about four years prior to that in '13. In 2017, they had a market cap of about $180 million listed on the ASX that were doing sales of $16 million annually. Today, it's more than 22 times the size in market cap terms. And on your numbers, they're going to be doing it at about 22 times the amount of revenue or sales in FY 21, which will put it at about $390 million. How should we be thinking about growth moving forward? So you mentioned... I just want to clarify around the acceleration in growth. So you talked about, if your numbers prove correct, they're going to do 380, 400 million in sales FY20. FY 21, I should say. You talked about getting to a billion dollars worth of sales. What's the timeframe around that?

Jono Higgins:

Yeah. I think we're modelling a billion dollars in sales in roughly the FY 24 year. And one thing I would note with Zip in general is we have covered it for a long time, and they've got a track record of beating our expectations by some way. We'd like to err on the side of conservatism. The way that the sector thinks about valuations more broadly is at the moment, I think for Afterpay, they're paying close to 20 times annualised sales for that business. So who knows what the world's doing in three or four years' time, but if we're looking at a similar type multiple being held for a business like Zip, then maybe we're talking a 15 to $20 billion valuation versus the $4 billion valuation.

When we talk about an acceleration, what we are talking about, just to note for the listeners, is it's not a percentage-wise acceleration. It's very difficult to see a percentage acceleration as you're getting bigger. It's just the law of big numbers. But the reality is what we're looking for is we're looking for what we call net ad rates to continue increasing. So net ad rates for this sector are things like the number of customers being added per quarter per day and transaction volume per customer. Because you get this exponential effect where transaction volume goes up and revenue goes up, which is the key metric on these businesses in the short term.

What we have seen is we've seen all of the sector participants, and I just want to emphasise this for a moment. The whole sector is performing very strongly. We think Zip will outperform on the back of a number of different dynamics, but the whole sector is performing very strongly and we're seeing some exceptional growth rates. We're seeing Zip adding 8,000 customers a day. We're seeing Afterpay adding 15,000 customers a day. We're seeing Klarna adding 20,000 customers a day. Sezzle adding 5,000. These growth rates are extraordinary and they seem to be increasing.

Our view on valuation in these growth businesses is if they can hold the cadence to their growth rate or increase the cadence of their growth rate, then over time, the multiples in the business will deliver. And I can give you a very simple example. Zip's on something like six times forward sales into FY 22. If they grow their sales at a hundred per cent the next year, then they'll be on three times forward sales. If the market's prepared to still pay six times forward sales, then the share price will effectively double over the next 12 months and that's with no rewriting. That's what's attracting us to the sector. The growth is proving to be dynamic and it's proving to be better than what we thought. And if that's the case, if there are multiple holds the same and there's no rewriting, then you're going to see some exceptional performance out of most of the names with Zip included.

James Gerrish:

So that's obviously the reason why we're seeing the competitive landscape intensify a little bit. You spoke of PayPal going into the space that it's only getting a small amount of traction thus far. CBA has a buy in four product. They've also got a large investor in Klarna that you spoke of over in the US market. How does M&A come into the sector from now? Obviously, Zip's bought Quad. They've also bought a bunch of other businesses overseas. Are they a natural acquire of other businesses, or are they a potential takeover target themselves noting that Afterpay's a $30 billion market cap, Zip's a more digestible $4 billion market cap.

Jono Higgins:

Yeah. Look, I think that's right and we shouldn't lose sight of the fact that Zip at a $4 billion market cap is still a small-cap stock in the US and even Afterpay with a $30 billion market cap is still tiny in the scheme of things. So there's still plenty there. I think we sometimes overemphasise how much our sector weight is there, but what I'd say is I think there are two different time horizons for M&A. I think in the short term, the time horizon is that smaller players will start to get snapped up by the larger players. We're seeing that with Zip buying a European subsidiary for the licencing and some volumes there. We saw that with Afterpay buying into Europe in the same way. We saw it with Zip buying into Quadpay initially.

So I think in the next 12 months, we'll continue to see the consolidation of the larger players of the smaller players, particularly in jurisdictions or products that are interesting. I think we'll continue to see that, but I think larger-scale M&A, as in when we've got number two and number four, and number two and number five getting together type thing, that's coming, but it's more like a 24-month dynamic. And typically we'd look to see that in sectors like this when we're seeing competition really starting to intensify.

What I'd be alluding to there is when margins are starting to come down a little bit, when they're having to fight more at the checkouts. It's not now. At the moment, you can pick up the growth pretty easily and not have to pay huge multiples for it, but that's probably within the next 24 months as an example. So what I'd say about competition is in the short-term, margins give us an idea of where competition is. Particularly sitting here in Australia, locked up during COVID, it's hard to get across and hit the ground. So if I give you an idea of where competition and margins currently see it, Afterpay's margin is a flat year on year and a flat half on half. Sezzle's margins have gone up in the last quarterly on the prior quarterly. Zip's margins have gone up in this quarter and the last quarterly.

We think it's a little bit overdone this talk around competition in the short term. And I think long-term 5, 6, 7, 10, $20 billion acquisition, whatever it is for the payment majors, whether that's a PayPal, a MasterCard, an Afterpay, any of these types of businesses or one of the US banks. They're not announceable events in the US in the context of how these businesses still are. So 24 months away from the major consolidations, we think, so that's still a fair way away in this world. But in the short term, I think you do want to be careful of the smaller players. Our view is to be careful with the smaller players because the larger players effectively have the capital to really go after them, and they can raise capital at very short notice and they can fight them in the checkout. So we think just keep to number one and two on the ASX. That's Zip and Afterpay.

James Gerrish:

You made mention of metrics around quarterlies, et cetera. Simplify it right down for the listeners and perhaps give them one or two things that we should be looking for when Zip produces a quarterly... Or any of the buy now pay later companies to produce their quarterly numbers. Are we talking customer ads? Are we talking transaction values? What's your go to that you really look at first when you're analysing a quarterly?

Jono Higgins:

Yeah. I think the easiest one for listeners to understand is just transaction volume. So what we're looking for is we're looking for transaction volume that's nominally growing and accelerating quarter on quarter or year on year in seasonal periods. So if I talk about specifically the quarterly season coming up, so all the majors finish their quarterlies in June, and they'll have them out in July at some point. Because we're looking at the first couple of weeks of July for a quarterly. The main metric, what we're looking for is we're looking at transaction volume that's ahead of our estimates. For Zip, I can give you a number. We're expecting about $800 million Australian in terms of transaction volume. If they do anything larger than that number in Q4. So this is quarterly now, then that's looking very positive for the stock.

Look, if listeners want to get more in-depth, what we're looking for is we're looking for average spend per customer and per merchant continuing to rise. Because what that means is you've got underlying adoption in the channel. So more customers are spending more and more places. It's creating lifetime value across all the majors. So we've seen that playing out. We just want to continue to see it play out.

And then in the more medium to long term, we want to see margins holding up. We want to see capital starting to increase, but what I would say is that most people should be looking forward in the quarterly season in July. They should be looking for the international players continuing to accelerate as well as the Australian players. We have end of the financial year, which is a strong period. In June, we've got Amazon Prime Day in the US which is a big major online spending event. So we should expect March, April, May, June all to be really strong months. And they should be ahead of what's a seasonally slow period where all the major players beat seasonality. So you should expect, in our view, a really strong quarterly reporting season for most of the companies. And it's not a backdrop where we've seen longer-term yields starting to come down a bit or at least hold constant. So there's probably a reasonable setup starting to play out with growth overvalue in the short term.

James Gerrish:

Yeah, I agree. And it's something we've been writing about in reports of late. So this is a pretty edgy business. There's no doubt about that. It's operating in a pretty new and edgy market. Executing on their strategy is certainly a risk that I see, particularly in the backdrop of a rising competition. I know you've suggested that might be a little bit overemphasised at the moment. What are maybe one or two of the main risks in your mind that you focus on and we'd like to flag?

Jono Higgins:

Look, I think the core one is probably what you've identified, James. So execution risk is the biggest in these businesses in the short term. They're all taking hefty chunks of business and expansion activities offshore to requiring significant amounts of expenditure. That's big amounts of hiring, marketing campaigns, technology and the like is probably the key risk. I think in the businesses. Are they biting off more than what they can chew? At the moment, the majors have demonstrated they can do that well, but that might not always be the case as they get bigger. Both the majors in APT and Zip is still predominantly founder-led companies with a very strong second tier, but founder-led at the top.

I think the second risk is just I think as we're seeing just discussion around competition in the facet of valuation. The biggest risks into these businesses in the short term with share price come from if there's a rotation or a continued rotation from growth into valuation. The buy now pay later companies are all valued on a brute force metric of say a price of sales multiple. We've seen a rotation since January, February into value stocks, which have got typical earnings and got cyclicality to their earnings. So if we see that continuing and we see yield starting to rise, that's going to really hurt in the short term because these are highly valued stocks. That's a company-specific risk.

And then a valuation specific overlay, I think for investors to be aware of. Because look, it really has hurt. We've seen the share prices of these businesses compress back towards multiples not seen for the last two to three years. We're still seeing really strong performance over the long-term, but in the short term, they've been somewhat friendless on the back of just that rising bond yield environment, which we've seen start to slack a little bit at the moment.

James Gerrish:

Yeah, exactly. Right. And you are starting to see the early signs of money flow back into that higher price technology growth-orientated part of the market. I just want to finish up today just by... You mentioned founder-led businesses and obviously that that's now at the top. There's a number of layers of management underneath that. How do you rate the management of this business? Bearing in mind that the capacity to be dynamic in this market is really key, I think. And I think that's something that Zip has really shown their hand at. They have been a lot more flexible and been able to evolve as opportunities have presented themselves. How do you rate management, Jono?

Jono Higgins:

Yeah. Look, I think management's one of the most first grade management teams I've met. I think it comes from a background of having known them for a significant number of years. I recall meeting management when they were doing a few hundred thousand dollars in sales and struggling to get finance out of venture capital firms in the US and getting charged 15% to do it. I'm looking at a management team that's been dynamic and grown up to a 450, $500 million annualised sales run rate, made an overseas acquisition, which has been incredibly successful and is now one of two major payment players that are worth in the billion dollars.

I think management's got duration and they've got ability. But most importantly, I think they've actually been hiring strong management teams and also real strong buy in across multiple layers of their organisation. So the US business, when they acquired Quadpay, they still have Brad Lindenberg and Adam Ezra involved there who were the founders of those businesses, which run their business. I think they're an incredibly high-quality management team in themselves. They've got really strong management in the UK. They've been picking up people from PayPal, Amazon, Shopify. I think they have really built the second tier of management to take this business to the wider stage and it's no longer just those guys that are doing it.

A lesser-known one is also touching on the board. They have refreshed the board. They've recently brought in a new chairwoman who's come on board in the last few months. They brought in a couple of new directors. So we continue to see them making the right steps in terms of corporate governance. You wouldn't think it would be an easy board to be on just because of how dynamic they are and how many locations and products they are in. But I think they are making the right steps to be sustainable, and they have proven an ability to be profitable in their core markets. So I write the management team as one of the best in the market, and I've had the benefit of having seen them operate for six or seven years with almost flawless execution today.

James Gerrish:

So anchoring any investment can be a good investment. It just depends on what you pay for it. You've set out a pretty bullish outlook for the company and all things being equal. We should be seeing a buoyant share price as this execution, the level of growth is achieved. What's your target price? You've obviously got a buy on the stock given the rhetoric that you've been detailing now. How high do you think Zip can go in the next 12 months?

Jono Higgins:

Yeah. We've got a 12-month price target of $16 per share on the stock. So we think a potential catalyst on that would be good quarterlies, merchant announcements and the like. Particularly large and strategic merchant announcements, as well as just continued growth. The benefit of a business growing like this is that over time, as long as the growth dominates, the share price should look after itself. So we've got a $16 share price target on it.

But what we would make aware of is just what you've spoken about with your listeners earlier on the call around the volatility and the share price. We have seen significant volatility and we'd expect to probably continue to see that moving forward. There's a lot of beta in this stock in terms of its correlation with the market. It does move in various directions in a strong way. What we'd say is that at the moment, in the short term, short to long-term, in the long-term, we continue to see growth dominating, and so people should remain patient and keep a core position in that stock.

In the short term, we're seeing short interest, which is people that are borrowing and betting against the stock at levels that we haven't seen since December, July, August last year, when the company had some positive quarterlies and had some very strong share performances. So we've seen that moving into this quarterly the same thing. If we get a good quarterly out as if in the short term, we could see some extreme volatility towards the upside is our view in the short term. That's weeks to months away. But in the long term, we continue to see $16 is probably a base case if they continue to do what they're doing.

James Gerrish:

The potential for some followers coming into some good numbers. Just to give listeners an understanding of our positioning on the stock, we've got it in two of our portfolios. We've got it in the Emerging companies portfolio. We've bought that near a $5. We've got in our Flagship Growth portfolio. We've bought that just below $7. The share price is just above $7 at the time of recording. As Jono just mentioned, he's got a price target of $16. It is a really strong growth story in my mind. I think the management team is well-credentialed to execute on the strategy that they've outlined to the market. So look, I remain positive on the stock and I think it's got a really positive six to 12 months and further ahead of it. So I'll finish up there, Jono. Thanks very much for providing us your insights today. They've been really useful and I'm sure that listeners have got a lot out of it and can better understand the Zip business going forward.

Jono Higgins:

Thanks very much, James, and appreciate all the time from the listeners.