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Zip share price forecast: UBS ups PT by 51%, lowers rating to Neutral

We examine why UBS significantly raised their share price target on Zip, while at the same time lowering their rating from Buy to Neutral.

(ASX: Z1P) Source: Bloomberg

Zip share price continues to trend higher

Zip's (Z1P) QuadPay acquisition appears to be one of transformational significance for the fast-growing company. Indeed, as a combined group, Zip (inclusive of QuadPay) will have direct exposure to a significantly larger retail market, see its total transaction value (TTV) climb to ~$3.0 billion, its annualised revenue jump to ~$250 million, and its customer base balloon out to 3.5 million.

On top of that Zip announced it would be raising up to $200 million in capital through the issuance of convertible notes and warrants. The deal, in combination with the acquisition is ultimately a complex one, but one that the market received favourably when first announced.

Specifically, when this news broke, the Zip share price was bid 38% higher on the day of the announcement and 22% on the following day. Overall, the Zip share price has more than doubled in the last month, trading at $6.03 per share (+6.91%) as of 11:30am.

The UBS view

Bold acquisition or not – UBS today revealed that while they had increased their price target on the fast-growing company by 51%, to $5.60 per share; they had downgraded their rating on the stock, from Buy to Neutral, based on the strong share price rally the company witnessed in the wake of the QuadPay announcement.

Mind you, though UBS has lowered its rating, overall it was noted that the investment bank’s analysts were ‘positive on the deal and think Zip has a credible strategy to grow Quadpay.’

‘The Quadpay acquisition is transformative for Zip and, combined with Zip's UK expansion plans and South African exposure (PayFlex, 25% stake), Zip's international opportunity is significantly larger than ANZ,’ it was also noted.

In saying that, UBS had a number of reservations about the acquisition, including the ‘true’ dilutive impact of this above mentioned complex deal. On that front, it was noted that:

‘Our base case assumes a +50% increase in Zip's share count over time as a result of the Quadpay acquisition, management earn-outs, employee options and dilution from the Convertible and Warrants.’

Elsewhere, ambiguity around QaudPay's economics, whether QuadPay's revenue and net transaction margins (NTMs) could be scaled effectively, and intense competition in the US buy now pay later space, were also concerns that UBS analysts flagged.

How to trade BNPL stocks

What do you think: are you bullish or bearish on Zip's future prospects? Trade accordingly. For example, you can trade Zip shares and other BNPL stocks – both LONG and SHORT – through IG’s world-class trading platform now.

To buy (long) or sell (short) Zip with CFDs, follow these simple steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter 'Zip' in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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