Zip share price: Why Citi recently raised their PT +75%

We look at Zip’s share price performance over the last few months as well as Citi’s recent note on the stock.

Zip share price volatile following February high

After hitting a 52-week high of $14.32 per share in the middle of February, the Zip (Z1P) share price has faced heavy selling pressure, falling close to 30% from that top.

In general, equities – but particularly stocks trading on high multiples – have faced heavy selling pressure in the last few weeks as renewed fears of rising interest rates emerge.

In saying that, despite this short-term price weakness, the stock remains up a staggering 872% from the low it recorded last March, as investor enthusiasm around the BNPL sector continues to ratchet up.

We have covered Zip’s recent share price run at length, given that it has consistently been one of the most traded Australian stocks in recent times.

This trading activity looks to have been spurred by an impressive quarterly update that the company released towards the end of January.

Citibank has taken notice. Analysts from the investment bank, who previously had a $6.50 price target on the stock, seem to have had a change of heart on the company, bumping up their price target to $11.35 per share, while shifting their rating from Neutral/ High Risk to just Neutral.

So, what is Citi currently saying?

First, on reconciling the significant price target upgrade against its Neutral rating, Citi said:

‘With US still early in the BNPL penetration phase with a large TAM, we see upside risks to our near-term forecasts, however we are Neutral rated as we continue to see risks to medium-term outlook due to competition and Zip’s lack of scale internationally.’

Secondly, in response to Zip’s latest quarterly update, Citi upgraded their earnings (EBITDA) outlook off the back of stronger total transaction volume expectations. Ultimately then, the new price target, according to Citi analysts ‘reflects earnings upgrades, higher multiple in our relative valuation and lower cost of equity.’

Citi isn't blindly bullish however, with analysts questioning the sustainability of Quadpay's high transaction margins.

‘Competition continues to be a risk and we expect the consumer fee to come under pressure with increasing BNPL penetration,’ the investment bank flgged.

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