Stocks In Focus: Zip, May 14 2025

0:28A listener production. some time with us. I'll tell you a bit more about both those in a minute. But first, let's introduce today's guest, Motley Fool gun analyst, Mitchell Lawler. Mitch, g'day. How's it going, Scott? Mate, I'm very, very well. Thank you for spending some time with us and sharing your expertise. We're going to talk about a company called Zip. Plenty of people know it. And I've got to say, mate, I do regular radio spots and I often talk about the top and bottom movers on the ASX. Zip is almost always in that list or somewhere thereabouts. It's been a fascinating company to follow, to watch.

0:56And of course, we're going to hear you analyse it in just a second. And before you do that, I'm going to share a couple of thoughts with our audience. Firstly, the usual disclaimers. This is general advice, only not personal advice. We can't give personal advice here at The Motley Fool. And if we did, we have to use massive amounts of paperwork, thick documents, and all sorts of fun stuff. So we can tell you what we think about a company. We can't decide if it's right for you. You've got to decide that for yourself. Second thing, we're recording this in the first couple of weeks of May 2025. If you're listening or watching this at some future date, our views may have changed.

1:28Now, we're long-term investors at the Motley Fool. Hopefully, you know that by now. Our views won't change too often, too quickly, but anything can happen. The company's fortunes could change, competitors, the price, of course, could move. So, again, when we share our thoughts, we're sharing them at a point in time. Please just remember that if you're listening to or watching this meaningfully later than the middle of May 2025. Now, before I let you loose on this particular company, I'm going to just share with our audience two things. Firstly, if you're watching this on YouTube, thank you for sharing a bit of time with us.

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2:51enough ads, Mitch. Mate, I think most people probably know roughly what Zip does, but tell us the full story. What is Zip? What does Zip do? Yeah, so Zip is one of the big names in the buy now, pay later space. And I think, as you mentioned, a lot of people already know what that is because they've probably already used it before. And so, I'll give a bit of a brief overview, but essentially, before there was buy now, I'll Pay Later, there was lay-by. Some of us maybe are too young to remember lay-by. Be nice, be nice. I do recall when I was a kid and wanting a particular toy and we didn't have the money for it at the time.

3:37And so you put it on lay-by and essentially that was, it was kept at the store and you would contribute money towards it over time. And once you actually paid off the full amount, You got to walk home, walk out of store with that item. And Buy Now Pay Later really flipped that on its head, I suppose, and solved two issues, which the first is stores were collecting a large inventory of stock when they were putting a lot of items on lay-by. They're out the back taking up space. There's a real cost to that. and secondly, people really want the things that they want today, not in a month's time, not in six months' time.

4:21They want it now. So Buy Now, Pay Later allowed, solve those two issues by the company such as Zip. They're essentially an intermediary and they provide the upfront payment for the item to the merchant. so they get made good. And then the customer gets to walk out the door with the item today, the moment that they want it, even though they haven't paid for the full product. And then the customer will pay that item off in installments, similar to lay-by, but to zip rather than the storefront. Nice, great summary, mate. Again, people have used it. There's also the kind of 40-hour interest-free kind of deals that have gone around.

5:09Buy now, pay later. It's not even a particularly new concept, new-ish, but it's just another form of debt. And of course, Afterpay, the big rival for Zip, really kind of apified and made it cool, really exploded the sections of quite a few players now in this space, including today's company, Zip. Now, tell us about Zip the business. Yeah, so Zip the business, they have a few different, I think there's about four different products that they offer, Zip Money, Zip Plus. they're all variations of of uh the dollar amount in which they they cover for uh the consumer most of them are interest free as you mentioned so they really make their money through uh a payment from the merchant so the merchant is getting that value from not having to store the inventory and they're also getting better conversion rates they're getting more sales often is the case.

6:03And so, they're willing to pay businesses like Zip money for that. And then Zip also typically charges some fees to the customer as well. If they have late or missed payments, they might incur a fee. And then in some of the other offerings that they have, they do charge interest just like any other lender would. And I suppose a point of difference with Zip compared to some of the other buy now, pay later companies is that Zip has had a credit license for a while now. They've taken a proactive approach in really accepting that the general understanding of the industry is that buy now, pay later is credit or it's very similar to credit.

6:52And so, they have been at the forefront, I guess, a little bit more proactive than its peers. in adopting that approach to it. And I think that's a positive because there actually has just been some recent regulation that's come out in Australia where buy now, pay later will actually be treated as credit. So I think it's from the 10th of June this year, anyone providing a buy now, pay later product in Australia will need to have a credit license. And Zip is in that position where it already has that. Beautiful. Ready to go, mate. Let's go from the company to the investment. Now, we're not going to give a formal recommendation today.

7:40We're just going to simply share some thoughts. So, Michelle, I'm going to ask you for the pros and the potential cons of an investment in Zip. Let's start with the pros. Why would someone watching or listening want to consider an investment in Zip? Yeah, I think the positives is that This is a really fast-growing industry and there's a lot of potential still. I mean, younger demographics generally seem to have a aversion to traditional finance. They don't necessarily trust credit cards and the big banks that offer those solutions. And they're more comfortable with these more modern, more approachable, you know, app first solutions offered by the likes of Zip.

8:25So, as the demographic, you know, comes of age and are becoming big spenders in the economy, Zip is sort of in a position where it could gain a lot of that wallet spend, that share of wallet over time. And it's a large market. They have quite a significant position in the United States, which is actually bigger now than its Australia and New Zealand operations where it first established. And so, yeah, I think there's a lot of potential. And it is, you know, some people may not like the concept of buy now, pay later, but it is being used. We have to accept the fact that it is popular. some people might have heard that one of the recent music festivals Coachella in the United States about 60 % of general admission tickets were financed using some form of buy now pay later solution so it is very popular popular and I think that's probably a trend that won't really be leaving anytime soon yeah no summary personally I hate it as a financial advisor I'm always worried about people's finances.

9:36I hate buy now, pay later. It just encourages more debt. Some people say they're better than credit cards. It probably is because there's no interest, I guess, at some level. But anyway, that aside, as you say, what we think about the product versus the company are very, very different things. I can just like something doesn't mean people aren't going to use it. So you're right. We have to look very clear-eyed at the investment thesis based on the usage of the product, the profitability of it, not whether or not I wish it could go back into the hole from which it crawled out. But that's a whole different conversation, Mitch.

10:05at fool.com.au forward slash listener.

10:11Let's flip the tables. Let's talk about the cons. Why would people maybe be cautious or avoid an investment in Zip? Yeah, I think the big thing that, the big risk to Zip is that with this further regulation where it's been treated more as credit, yes, it's been proactive in having a credit license, But I think that also levels the playing field across the board. So, it now is on the same page as any or other lenders, your American Express, your big banks. And in that environment, I struggle to see how it really differentiates itself, where it will be able to set itself apart. Even Then PayPal, which has a huge base of customers, I think it's over 400 million active users of the platform, it now offers, you know, installment services baked in to its platform.

11:11Commonwealth Bank is the same. It offers installment products through the ComBank app as well. So, I don't really know how it maintains some sort of competitive advantage to ensure that it can have a margin. And on the topic of margin, it's still – I don't think it's really net profitable. The management team talks about cash profitable, which leaves out interest in that calculation. Interest is a very important part of this business because Zip has to take on a lot of debt to actually finance these upfront payments to merchants. So, interest is a large cost and I think you can't really just ignore that when you're looking at the profitability of the business.

11:59And secondly, it is very susceptible to economic downturns. Because of that interest, because it is funding customers largely discretionary, some non-discretionary. But as people come on hard times, these are unsecured loans. There's nothing to go out and say, oh, hey, give me that back to cover your outstanding payments. People are using this to fund burritos and fast food. So, it's gone. It's consumed. So I think it's a risky business in that regard as well. Nice. So a very nice set of pros and cons. Again, not a formal recommendation, Mitch, but I am curious. Do you reckon it's going to beat the market over the next five years?

12:47Look, I used to be pretty optimistic on the industry. I actually own shares in Block, which acquired Afterpay a number of years ago. Not that that has performed too well for me over the last few years. But yeah, look, I think the sticking point is trying to produce profits. Like as long-term shareholders, you want your business to be profitable over time and you want that profit to be sustainable. In an industry that's becoming more regulated, leveling the playing field between traditional credit and this new form of credit, But I really struggle to see how Zip would necessarily outperform the market in the medium or long term.

13:33There you have it. Thanks for watching and listening. Mitch, talk about Zip. ZIP, by the way, is the ASX card. I didn't mention that at the top, and I should have. Some bright spots, maybe some risks, and a question as to whether there's an online. If your product becomes someone else's feature, you're in trouble. Is the future for buying out payload a standalone middleman like Zip and Afterpay, or is it going to be the payment providers like the PayPals and the CBAs that offer those services? That concern is enough to keep Mitch on the sidelines on Zip. Again, we can't continue to do what you should do personally and our views may change in the future.

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