Citi upgrades Zip Co on US growth and new product in Australia
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The news: Citi has upgraded its rating on Zip Co, as accelerating US growth and the launch of Zip Plus in Australia boosted time to value (TTV) forecasts for the buy now pay later company.
The numbers: Citi upgraded Zip Co from 'neutral' to 'buy', and increased its target price from $1.21 to $1.40. Analysts said that while they "still have concerns" on Zip Co's lack of scale in the US, the upgrade was driven by upside risk to its FY25 cash EBITDA forecast, which sees Citi 13% ahead of consensus.
Analysts upgraded Zip Co's FY25 TTV forecast by 1%, and its FY26 TTV forecast by 7%, reflecting stronger TTV growth in the US driven by its new merchant pipeline.
Citi noted that on the Australian side TTV was down 7% which reflected the company's focus on reducing costs.
With US TTV growth up 32% year on year in the December quarter, and the launch of Zip Co's new low interest account product Zip Plus in Australia, Citi said it sees upside risk to its TTV forecasts.
Zip Co shares jumped in January after the company posted a 10% year-on-year cashflow rise for the second quarter.
Shares were trading 2.3% higher in early trading on Wednesday, reaching $1.31 at 10:40am AEDT.
The context: Citi noted that Zip Co also made good progress on fixing its balance sheet, with the company pointing to lower margins for upcoming renewals. But the analysts were cautious that the corporate facility was "quite expensive when considering the exit fee".
Higher bad debts represent a key risk as Zip Co pivots towards focusing on growth in the US, Citi said.
The upgrade comes a day after the Albanese government opened a consultation on draft legislation to regulate buy now pay later products in Australia.
The draft legislation amends the law to bring buy now pay later products — which aren't currently subject to the regulatory framework that applies to other credit products — in line with other types of credit.
The source: Citi research report
