Zip: Is it back? | Company Deep Dive

Bryce: [00:00:31] Welcome back to another episode of Equity Mates, a podcast where we explore what is possible in the world of investing. Now, if you've just joined us for the very first time, a huge welcome to the show, to the equity mates community and to the journey of investing, we have a huge episode to get through today. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:00:51] I'm very good, Bryce. I'm very excited for this episode. Now, I know you're getting a bit older, but I want you to cast your mind back to when you were a young, sprightly 20 something year old last year, back to your 20s. Not last year. And in your 20s, there were some amazing stock stories that was off to pay, but the number one meme stock has to be the company that we're talking about today. And I know it's a long way for you to cast your mind back, but it captured Australian investing minds. Today we're talking about Zip.

Bryce: [00:01:29] Zip Co, that's it.

Alec: [00:01:30] Somehow shoehorn a sledge of your age.

Bryce: [00:01:33] And that's right. Yes. The Zip Co, the ticker ZIP 

Alec: [00:01:41] You're not gonna forget it.

Bryce: [00:01:42] Listed on the ASX. Did it certainly capture the minds and imagination of many investors back when buy now pay later was absolutely ripping. And, yes, we're unpacking it today. 

Alec: [00:01:54] The thing is, though, it's ripping again. And the question is, is this really sustainable? Are we back to Bryce's 20s and the year of 2020 and 2021, or is this a blip? And luckily, we're not going to try and answer that ourselves.

Bryce: [00:02:08] This series wouldn't be possible without the support from Superhero Super. Superhero Super is a low fee, award winning super fund with a wide range of investment options and the flex to invest directly into ASX listed shares, ETFs and more. Superhero Super is primed for performance. They were recently crowned winner of excellent rates and phase best for direct Investment and runner up for Retail Superannuation Fund of the year at the WeMoney's 2024 superannuation awards. Remember, Superhero does not provide financial advice, so consider whether their product is right for you. Superhero Super is a sub plan of one super, which is issued by Diversa Trustees Limited as trustee. Read their PDS and TMD and download the superhero app at superhero.com.au. A reminder that on Wednesday the 10th of July, we are coming to Melbourne to do a live podcast. We cannot wait. The evening is going to be highlighted by a live Pimp My portfolio session, where Ren and I will be going through our portfolios every single position with Luke Laretive to get his thoughts on how we might be able to improve our portfolios, just like we do it with community members on the show. So if you want to say what is in our portfolios and say, if Luke can, roast us, then come and join us, at our live event in Melbourne. We're also doing an Ask an Advisor session as part of it where we'll be bringing in Dylan, one of our advisors, where you can answer all of your questions from the night, as well as, we'll be unpacking the news headlines, just like we normally do on the show. So come and join us. It's Wednesday, the 10th of July. Tickets are available at Equitymates.com/events. I think there's only about 20% left or so, so make sure you grab one. We cannot wait to see you there. Alright Ren, so where do we want to start with Zip.

Alec: [00:03:52] Let's start with the question. Is Australia's number one meme stock back?

Bryce: [00:03:59] I don't know if Zip would like to be known as Australia's number one meme stock, but no.

Alec: [00:04:06] Okay. Do the stocks get to choose? 

Bryce: [00:04:10] No, they don't.

Alec: [00:04:12] Does game stock or AMC get to choose if they were a meme stock? 

Bryce: [00:04:15] No. 

Alec: [00:04:16] And I think this is name, I'm more of a meme stock in Australia.

Bryce: [00:04:20] I can't think of one, to be honest. Well, to answer your question, Ren, maybe. So in a month and a half, it rose 133%. And that was from January 2021 to mid Feb of 2021. It went berserk.

Alec: [00:04:40] So Zip had a great run. So it is listed in 2016. And it had a great run as a buy now pay later company. But then that period January 21st to mid Feb 21 and that was after Afterpay had run. And as everyone was on the buy now pay later high and then it just went bang.

Bryce: [00:05:01] Yeah it went straight up 133% in a month and a half. 

Alec: [00:05:05] Got to like 14 bucks. Unfortunately for Zip it then fell.

Bryce: [00:05:11] Yeah. So fell 97% from its peak in 2021. But Ren, you ask the question is it back from November 2023 to today it is up more than 200%. So it's been a slow turnaround story but a turnaround story, nonetheless. I've made a lot of acquisitions, which we'll get to soon, but. Yeah. Is it back? Maybe.

Alec: [00:05:34] Yeah. So it's about $1.26 time of recording. So for people that ball right at the top and held on, they are down.

Bryce: [00:05:43] And it was down to $0.40 somewhere. What a ride. If you were on that, if you're on that buy now pay later. And the reason that we're talking about it today is it because it is one of the most traded on the superhero platform and a stock that continually gets spoken about, particularly in moment moments like this in the equity mates community, where it pops its head up, guys on a bit of a run and people ask, is it back? But if you've just joined us and you have no idea what Zip is, let's do a bit of a company overview.

Alec: [00:06:12] Yeah. Buy now, pay later was a great idea.

Bryce: [00:06:17] Awesome idea.

Alec: [00:06:18] It was really a product of like it was better than what came before it. And over time it inherited a number of the problems that it was trying to solve. 

Bryce: [00:06:28] So you're saying it was better than a credit card? 

Alec: [00:06:30] Yes.

Bryce: [00:06:31] And over time it became a credit card.

Alec: [00:06:34] Essentially. 

Bryce: [00:06:38] Very close, where in fact, a lot of the buy now, pay later operators offer credit card like products. 

Alec: [00:06:44] Yeah. Well Zip has introduced their own called Zip Plus, but we'll get to that. So, but it's a buy now, pay later company and for people unfamiliar with that, essentially allowed people to buy something and then pay it off, generally in four instalments over time. 

Bryce: [00:07:01] Interest free. 

Alec: [00:07:02] Interest free. It was founded by Larry Diamond and Peter Grey in 2013 and listed on the ASX in 2015. I think I said earlier that it listed in 2016, so I was wrong. The often forgotten part of Australian buy now, pay later history is that Zip was first. So Zip was founded in 2013. Afterpay was founded in 2014, Zip listed in 2015. Afterpay listed in 2016. So let's give us credit. 

Bryce: [00:07:32] Where credit's due. 

Alec: [00:07:33] Pun intended.

Bryce: [00:07:34] The stories are very different in terms of the ending. Well, not the ending there, but actually still active 

Alec: [00:07:40] Neither the story is ended. 

Bryce: [00:07:41] Yeah, they're both actually still active. It's just that Afterpay managed to sell to Block in 2020.

Alec: [00:07:48] Yeah, yeah, we're going to get to the financials later. But if you took the share price away and you just looked at the financials, you'd be impressed. Except for the fact it's not profitable. But like revenue you'd be impressed. But that doesn't tell the story of the share price obviously. So let's tell the story of what happened as a publicly listed company. 

Bryce: [00:08:10] So 2016, they started an acquisition spree. So they acquired Pocket Book in 2016. Then to expand globally. They acquired PartPay in 2019, which helped them open up in New Zealand, in the UK, then to push into the US, where it was thought that there was a much larger market for buy now, pay later. In fact, Australia started the buy now, pay later phenomenon. 

Alec: [00:08:38] Did we? So Australia claims it. But then there's Klarna, which is Swedish. 

Bryce: [00:08:45] Well, so I've actually got some notes down here a little further. They are the largest buy now, pay later market share. So that might 

Alec: [00:08:52] Klarna.

Bryce: [00:08:52] Klarna, yeah.

Alec: [00:08:53] And Klarna was founded in 2005. 

Bryce: [00:08:55] They are Sweden. Okay. So we didn't, so we were doing the the old.

Alec: [00:09:01] Leamington, Russell Crowe, but also we climbed from New Zealand.

Bryce: [00:09:05] To the meringue. No, that's also.

Alec: [00:09:06] isn't it. I don't know. 

Bryce: [00:09:08] Oh the pavlova?

Alec: [00:09:09] Oh have I got that wrong. It's not Leamington, it's Pavlova? Oh yeah. Yeah, that sounds right. Yeah.

Bryce: [00:09:14] Anyway, nonetheless, it was one of the first. 

Alec: [00:09:17] It was. Yeah.

Bryce: [00:09:19] It was out there anyway. So in 2020. In 2020 they acquired QuadPay to expand. 

Alec: [00:09:26] Sorry, sorry affirm which is the US one founded by the ex PayPal guy founded in 2012. So we're saying, well, first or second. 

Bryce: [00:09:36] All with buy now pay later is the first model. 

Alec: [00:09:39] Affirm. I think so.

Bryce: [00:09:41] Yeah okay. All right. Well okay. We'll then take that back. We weren't we were we were top three. 

Alec: [00:09:46] We were the best. 

Bryce: [00:09:47] We'll probably yeah we'll probably the biggest uptake. 

Alec: [00:09:50] Put it this way. We listed before Klarna or Affirm. 

Bryce: [00:09:54] Perfect there you go. That's what that's what the start that's.

Alec: [00:09:57] Affirm listed in 2021. Like the bull market was half done by, Klarna they listed, you know, it's still privately held. They missed the IPO window. 

Bryce: [00:10:09] Didn't Combank get it on Klarna. 

Alec: [00:10:10] Yeah. When Klarna launched in Australia in 2020, it was with Commonwealth Bank. 

Bryce: [00:10:15] In conjunction with. 

Alec: [00:10:16] Yeah. So there might have been some investment there or something. But yeah. 

Bryce: [00:10:18] Nice. So back to the story. They bought QuadPay in 2022 going to the US. Then in 2021 the bull market was roaring. They acquired middle eastern buy now, pay later company's Spotii and European buy now, pay later Twisto. So they bought bought to try and just get global presence. 

Alec: [00:10:36] Which is a good capital allocation decision if you know that you're if you're buying with all script and you know that your shares are massively overvalued. 

Bryce: [00:10:46] Yeah. So the what they 

Alec: [00:10:48] It wasn't dumb. Yeah that's what I'm saying. 

Bryce: [00:10:50] But since then the market has cooled. 

Alec: [00:10:53] Even if that's a good capital allocation decision, if you're buying unprofitable companies then you've got to support that cost base. 

Bryce: [00:11:00] And that's where it became a little bit challenging. They've subsequently started winding up or have wound up operations across Singapore, UK. PocketBook is done and the business tried as well. So really bringing it back and I think Larry moved overseas to focus on growing in the U.S. and just consolidating that market. Now they have a global CEO and an Australian New Zealand CEO, which I think is still Peter. 

Alec: [00:11:27] Yeah. So the founders are now CEOs of the respective companies, countries, Larry, US, Peter, Australia and New Zealand. And then it's Cynthia Scott who is the group CEO. And she's got a very corporate CV. She was at Telstra for a while. She was sent to a group. Yeah. So like she's the experienced ASX leader. 

Bryce: [00:11:55] So that's what it was. Ren, what is Zip today? 

Alec: [00:11:59] What is Zip today? Other than being back, you mean. Allegedly. 

Bryce: [00:12:04] Allegedly.

Alec: [00:12:05] So, Zip today really has 4 key products. It's still a payments player at its core. And that's what it's. That's what it's still doing. So it's got Zip pay. That's the classic paying for product. Then they've got Zip money which is a bit more I guess of like a flexible product. It's a digital wallet that can give you a line of credit up to 30 grand. Then a Zip plus, now this is kind of like a credit card model. So it's a line of credit with an interest rate of 12.95%. If the balance is above $1,500 at the end of each month. 

Bryce: [00:12:42] Yeah. So does that mean you don't have the interest sub 1500.

Alec: [00:12:46] Yeah. So so like. 

Bryce: [00:12:48] I see.

Alec: [00:12:48] So compare it to a credit card. And this is how I started by saying it's better than but it also replicates some of the challenges that came before it compared to pay peer credit card, 19.99% compared to 12.95%. So a better interest rate for Zip than a credit card and a credit card interest is charged on any balance over $0 at the end of the month, whereas Zip is any balance over $1,500. I think you can't argue with the fact that buy now, pay later has made it less costly than a credit card, but at the same time, there is still a cost. You know, like this consumer debt puts people in bad financial situations and it's expensive.

Bryce: [00:13:38] It doesn't make it a more right financial decision. 

Alec: [00:13:41] Yeah. And it's tough because the credit card players and the buy now pay later players can point to examples where their services have been the difference between people having like far worse outcomes, you know, like, they've kept the lights on or they've paid the rent or they've covered, you know, some unnecessary expense that was needed. Sure. And I don't think anyone would argue with that. It's just that the majority of your transactions aren't that. The majority of your transactions are wants not needs and put people in bad financial situations. 

Bryce: [00:14:15] So that's isZip plus and then to close. 

Alec: [00:14:20] Oh sorry. And then finally there's a business capital. 

Bryce: [00:14:23] So that's the core product. Let's have a look at some of the stats for FY 23. There's currently 6.2 million active customers with Zip. If you put that in perspective, globally, there are currently about 360 million buy now, pay later users expected to grow to 900 million by 2027 ff that, Klarna have about 147 million, Affirm 11 million, Afterpay ten. So Klarna is just dominant early to market and one of the biggest players. 

Alec: [00:14:54] I had no idea that they were that much bigger. 

Bryce: [00:14:56] Just enormous. Well, I think again, you said so. They're a Swedish company and the Swedish market share. It's huge apparently. 72,000 merchants on the platform that are 72.7 million transactions a year, 8.9 billion in transaction volume. So that means the purchases through the platform are to the tune of about nine, $9 billion and then made about $693 million in revenue in FY 23. They're definitely playing in a big market, a growing market. 16% of 18 to 34 year olds use buy now, pay later. Almost half of us citizens are interested in it. I think about a quarter use it. Big growing market. So you can understand why Zip turned to the US is a major focus. And of course Afterpay being bought by block and affirm. But yeah Klarna the biggest player in the market.

Alec: [00:15:51] Yeah. Yeah. So let's talk about financials and then we'll talk about the future because I think we're touching on some elements of the future there. But we don't want to go too deep down that rabbit hole. So earlier I said if you just look at the financials you would be impressed. The company listed in 2016. And if you'll indulge me, I'm just going to read the annual revenue number here from them. 3 million. 16 million. You know what I'm not going to say a million every time. All numbers in millions. 3, 16, 39, 82, 160, 394, 597, 693.

Bryce: [00:16:33] Wow. That is if you can indulge me further, can you give me the percentage growth rates? 

Alec: [00:16:38] I can

Bryce: [00:16:39] Let me just do this in percentages. 

Alec: [00:16:41] Let me do the maths in my head quickly. All right. I've got it. 462%, 139, 109, 95, 146, 52, 16. Now, you could say that that growth rate is slowing massively, but law of large numbers, like it's a lot harder to sustain a constant growth rate. 

Bryce: [00:17:02] Pretty decent and a particularly through the bull market. Is there some solid revenue growth. Has that translated to the profit line. 

Alec: [00:17:10] So Zip has never been profitable. So no. Last year it lost 377 million. But that was better than the year before where it lost 1.1 billion. The year before that, 678 million. The year before that. 20 million. So it's a big step up in those Covid years. 

Bryce: [00:17:30] That was acquisition fuelled. 

Alec: [00:17:32] Yeah. Yeah, yeah. That was that comment around when you acquire someone, if they're losing money, you have to support or support that cost base. But yeah like that revenue growth rate is seriously impressive. But really in terms of key takeaways from those financials. And to answer that question that we started with is Australia's number one meme stock back? My answer is not until it's profitable, but what if it becomes profitable. The market will change its mind on it I reckon. 

Bryce: [00:18:01] This slide says the ANZ business is profitable, so maybe they are just waiting for the group. You're right. Once the great it's the Americas rally that that you're looking for to turn profitable and then away you go.

Alec: [00:18:14] Yeah. So as we close out our section, I guess the question is what is it going to do to try and become profitable? What does its future hold? And for me, the original bull case about buy now, pay later is still the unrealised dream of the sector, taking a meaningful chunk of credit cards market share. So in America, according to the Federal Reserve, 82% of adults had a credit card in 2022. In Australia, I don't have the percentage of Australians with a credit card, but there's 13.5 million credit card accounts open, and a lot of them are joined because there's 17.7 million actual credit cards on issue. So, again, a huge percentage of its two markets have credit cards. And the original promise of buy now, pay later when everyone got super hyped when you bought Afterpay at $2 was if buy now, pay later can take 10% or 20% of the credit card market, that is massive.

Bryce: [00:19:15] Yeah, well, as you write, the thesis is certainly still or the opportunity is still there. And they've definitely built out their product's weight to try and capture a lot of that, because there is a difference between a classic paying for or having a credit card like Zip Plus that acts a little bit more like a credit card, you know? Yeah, you'd be using it for different things. So. 

Alec: [00:19:37] But that's where my biggest challenge with this company and this sector comes in buy now, pay later is a product, not a company. And I think it's really impressive like the entrepreneurs that built companies around it. It's incredibly impressive. Larry, Peter, Anthony and Nick at Afterpay, they built it's a product that was very easily replicated, like PayPal rolled out. They're paying for very quickly. Like there's no reason that any of the big credit card issuers, as long as they had like a digital wallet or something, couldn't do it. And these guys did the hard thing, which was building a company around a product. Like even a feature. Not even a product. Now that challenges, like, everyone can do it. So they've just got to take market share. They got to compete.

Bryce: [00:20:24] Well, that's so in terms of what. Are they going to do? What does the future hold? Obviously grow in the US and Australia to their major markets or their two markets that they're in? Grow product offering as you said, take market share from credit cards and build out the product suite that they've got.

Alec: [00:20:42] And here's my bold prediction to end it. Much like Afterpay was taken out by a bigger payments company. It wouldn't surprise me if the Zip got taken out as well at some point. 

Bryce: [00:20:52] Yeah, I'd be interested to know who though, because to your point, everyone, already done they're like almost the biggest in the world. 

Alec: [00:21:00] Well no, no. But yeah, they've already done the product but they don't. 

Bryce: [00:21:04] And the customers and they've got the customers. 

Alec: [00:21:07] But do they, do they have the same like the Zip 6.2 million customers. Are they the same as PayPal's? How many customers direct and PayPal has? I quickly did that. 

Bryce: [00:21:16] 35 million. 

Alec: [00:21:18] Really? Yeah, I would think that's small.

Bryce: [00:21:21] No, it's for the credit card feature, could be speaking out of school here, but they have. They're one of the biggest providers now the very similar to the credit card thingy. I'm not sure. I'm not sure about the buy now pay later. There's different numbers for different product lines. 

Alec: [00:21:39] Okay. So overall PayPal has 426 million customers here. So that big. But the question is like, who owns the next generation of customers? And I would hazard a guess that the buy now pay later is owned more of the 18 to 24 demographic than PayPal. 

Bryce: [00:21:58] Do you reckon? 

Alec: [00:21:59] I kind of reckon. 

Bryce: [00:22:01] I reckon more people have signed up to PayPal before they're signed up to a buy now pay later.

Alec: [00:22:05] Maybe maybe there. But anyway like that there's value in the. Yeah. That ecosystem that they've built. 

Bryce: [00:22:12] Yeah absolutely.

Alec: [00:22:13] And it wouldn't surprise me if a stripe or a PayPal, someone in that payment space says we'll we'll scope you out. 

Bryce: [00:22:18] Well, that's a good place to leave it. This series is proudly supported by Superhero Super. We wanted to tailor our super our way and Superhero Super provided that flexibility with a wide range of investment options. You can invest in professionally managed, balanced growth and high growth portfolios. Or you can add a range of ASX listed shares and ETFs. Recently crowned winner of excellent rates and fees and best for Direct Investment and runner up for Retail Superannuation Fund of the year at the WeMoney's 2024 Superannuation Awards. Superhero Super is a low fee, award winning super fund. Remember, Superhero does not provide financial advice, so consider whether their product is right for you. Investment limits apply. Superhero super is a sub plan of one super, which is issued by Diversa Trustees Limited as trustee. Read their PDS and TMD and download the Superhero app at superhero.com.au. Welcome back to equity mates. We're doing a deep dive on Zip. And we're really excited for this because we're joined by an expert who has been covering the buy now, pay later segment longer than anyone else in Australia. So it is an absolute pleasure to welcome Jonathan Higgins, head of research at Unified Capital Partners. Jonathan, welcome. 

Jonathan: [00:23:39] Guys, Bryce, Alec, thanks for, Alec sorry. Thanks for having me on today. Really appreciate the time. And good to get back into talking about a sector that was on the up, on the down and back on the up again now. 

Alec: [00:23:48] I know, I know, it's crazy. It is just amazing. The boom and bust cycle of the market is really exemplified here. So Jono, before the break, we've spoken a little bit about Zip, as a company, but we haven't spoken about it as an investment. So we really want to cover how you analyse it, what the bull case would look like, what the bear case would look like. And then, you know, I guess what, you'd be looking for a longer term as an investor and sort of what milestones you want to hit in and what it might look like. So let's start with how we analyse it. When you look at a buy now, pay later company, what are some of the metrics that are most important for you and how are you analysing Zip?

Jonathan: [00:24:27] Great question. And I think to set the same you know, let's talk about firstly where buy now, pay later has come from and sort of the original value proposition, because I think it's very powerful in the context of what these businesses could be worth over the long term. So, you know, traditionally credit has been an area, particularly in Australia, but also globally that's been dominated by major financial institutions. These guys are typically offering products like personal loans, credit cards and the like. When it comes to unsecured credit, you know, they're charging anywhere from 20 to 25% per annum. At current sort of rates, they're very hard to usually get in that, you know, you usually have to undertake a credit origination process. You have to fill in forms, go through a whole bunch of offline stuff. Maybe two weeks later, they send you a physical card in the mail and, and and all of a sudden you're then transacting and the average person transacting about $3,500 a month through these forms of payment, if you sort of flip it on its head. By now, pay later proposition was two fold. Number one, you can get credit in real time from anywhere from sort of $100 up to sort of 2 or 3 or $4,000, within a couple of minutes via a very quick origination process, via stripping your accounts, looking at some of the, the credit information that's available, and they can do it in real time. And then the second side of that was on the merchant side. Merchants could drive better conversion, higher average order value and deliver really an expansion in basket size. Now, the reason why I flagged this is because merchants are paying by now, pay later companies to then acquire these customers who they then make money off. They define merchant fees, other fees or via an interest bearing product as some of these products have got. So why this is very powerful is that, you know, effectively, most forms of origination require you to pay Google or an affiliate or something to pay. These companies at its core, actually paid to take customers and then potentially, over time, offer them services. So, you know, the biggest metrics that you look for in the early stages of the growth in these business is the adoption care. So what we saw prior to Covid, then during Covid, with things like active customers, we were looking at active customers, you know, how many, how many, how much they transacting, how frequently they're transacting, what methods. And then the transactional TTV, total transaction volume or TTV of these businesses and were really getting value out of that. You know, the sectors now matured a lot. And there's now really a focus upon both profits and also margins. You know, we're into the stage of the cycle where we've been past the early adopters. We're getting into the stage of the cycle where you need to make money. There's a cost to capital involved with it. And so what's really in focus, the key metric that all these businesses running at the moment is, either on a cash earnings basis or a net transaction marginal NTM, as Zip affectionately calls it in their presentation, which an NTM margin is effectively, your revenues that you're generating from your customers and your merchants, minus the cost of doing business on a variable basis. So that's things like your interest cost on your debt, you bad and doubtful debt costs, as well as your processing and transaction costs. And investors should think of that as being the gross profit of the business. And so that's really in focus, you know, consolidating that metric. If I could just take a moment just to talk about the sector. Look, globally, they're all, happy go lucky prior to Covid, there was plenty of blue ocean. This still remains that. But then we headed into Covid. You know, interest rates dropped, people started to promote. All of them started to fight at the checkout. Exiting Covid, there's now cost of capital. So what we are seeing globally, out of all the major clients, your firms you plan as you square, which is Afterpay, Zip is really capital discipline and returning to sort of profitable yields, putting in fees in the like. And we're seeing the whole sector starting to raise net margins across the group. So if there's two things you want to look at as an investor over the next 12 to 24 months, it's net margins because that'll create your profit. And then it's cash EBITDA, which is your discipline against your operating cut cost base. 

Bryce: [00:28:01] Fascinating. Well, we want to turn to the bull case. And you spoke a little bit there about the industry, but it certainly feels like yeah, post-Covid and the acquisition of Afterpay, which is probably going to go down in Australia as one of the greatest exits of all time. But, we've seen Zip go from $0.40 to $14 and right back down again. So when you're thinking about the bull case for Zip, what sort of foundations go into that? And I also think from an industry point of view, like where is the bull case for the industry as well. 

Jonathan: [00:28:35] To come at the bull case. It's interesting to use Australia as an example. You know, we are very rarely the tip of the spear when it comes to technology. But in financial services we can be ahead of the curve and buy now, pay later, it was one of those things. You know what we saw, what we've seen in buy now, pay later in Australia is roughly sort of 40 to 50% of people in Australia have used buy now, pay later at any one time. And out of the younger cohorts, you know, I think people that are less than the age of 50, you know, that penetration rate rises to sort of almost 60% of people. And the average customer in Australia is transacting with buy now, pay later every quarter, anywhere from sort of, $400 to a thousand bucks, an average is sort of 6 to $700. Now, the reason why I give you this reference is buy now Pay later is an Australian innovation. It's gone global. And we're now seeing this starting to be adopted in the likes of the US, Europe, the UK and emerging markets. And the bull case is very much that we take levels of adoption that we've seen in Australia. And we see those levels of adoption rise and sea penetration in the US. So right now in the US, on on sort of a like for like basis, the current rate of penetration is more like 20 to 25% versus for about 50 to 60 you heard me talking about. And the average customer in the US is spending about a third less. So there really is an opportunity for these businesses to get three times the size based on people using it three times as much. And there's also the opportunity for there to be twice as many customers in what a large markets, you know, Australia market at 20 million adults, America is 200 million adults, for example, and they have a higher rate of online spend. So the bull cases that they type, these penetration rates buy now, pay later and they expand them globally to do it. And the bull case against this, the very match, the bookcase against this. They're taking a fintech like mentality to do that in that you've got a basis where like these businesses don't have branches, they don't have a lot of staff. They take a digital and a fintech mindset and they're charging really strong risk adjusted returns. So I'll touch on this in that the typical bank, if they're a great bank, the best banks in the world are all in Australia in terms of their returns. They charge anywhere from 1.9 to 2% on the net interest margin above what their cost of funding is. If you look at the buy now pay later and we'll use Zip as an example, Zip in Australia has a adjusted revenue yield of about 18 to 19% per annum and posted the cost of goods sold in the like. They make a effective yield here, sort of north of 6 or 7% per annum. In the US business with receivables rotate quicker. They make an adjusted margin of over 2% on each transaction. They rotate that 12% a year. So on a like for like basis with banks in Australia, they make seven. In the US they make over 20 and your traditional mate makes over two. So these businesses should. And if they can keep their margins where they are or increase their margins, they should be highly profitable, make huge profits and scale and deliver a real capital efficient way of undertaking their businesses. So the bull case is that they generate significant penetration. And we're starting to see that at the moment, the average sector growth rates about 30 to 35% year on year. At the moment in the US, on some large companies, Zip, I think in the last quarter was growing 45%. So, you know, the bull case is that you get yeah, you know, significant above market rates of growth and operating leverage and operating profits at scale. And that should generate hundreds of millions dollars of cash EBITDA, hopefully on an annualised basis Zip for a couple of years out. And hopefully a share price is well in excess of. The current share price is great. 

Alec: [00:31:56] Wow God that's exciting. Just from a content point of view, if Zip comes back, we're going to have podcasts for days over here. Well, just following up on the bull case, you gave us those two metrics earlier, net transaction margin and cash EBITDA. How does Zip compare to some of the other, buy now pay later in the sector on those two metrics?

Jonathan: [00:32:17] Yeah. Look, it's a great question. Look, they're all not created equal. Would just be my first comment. You know, if you're looking at Afterpay, they're still running predominantly a pay paying for type model. Zip runs a paying full time model in the US. They just want to pay in eight model. And in Australia they have a digital wallet which rotates twice a year, rather than 12. So it's not a like for like but they do compare very favourably would be the the broad brush strokes. The question in that you've got a business that right now is, I think making a 3.9% net transaction margin. So that means that on every dollar of transaction value they do, they make 3.9% of that as a gross profit number. And then they put their corporate costs against that. That's up over 100 basis points in the last year. And you heard me speak earlier around how some of the costs of fund, you know, the things that go into that net margin, the cost side is the cost of funds, which is interest rates. We've seen interest rates going up globally across the world the last two years been very painful. And we've also and it's also bad debt. So in the in the context of the consumer getting tougher interest rates going up. Margins have been going up progressively as they've been repricing and becoming more rational in line with the sector. So they would just about lead the sector. They'd be roughly comparable to a firm which is a US listed business, which looks very similar to Zip in terms of on a global basis. And they'd be like they'd be ahead of the likes of your Afterpay and the like, which run more sort of your 2 to 2.5% net margin. The difference being, you're off the pace in this world and you sizzles these types of names. They have products which just typically focus around paying for. Whereas the benefit Zip has is they have a very wide platform. They'll offer you an interest free. I'll offer you a digital wallet. They'll offer paying for, paying out. And they'll do it all in the idea of their ecosystem. And they've been very successful over that. And as we're seeing the world start to focus more on credit, that's becoming more involved with companies like Zip as well. 

Alec: [00:34:05] So let's turn to the, I guess the bear side of the story. If, if you were to start to poke poke holes in the bull case or just if you would, to sort of point to, like key areas of risk for the sector and Zip in particular. Where do you start?

Jonathan: [00:34:20] There's two bare points, and it's very easy to come up with bare points after you've watched what's happened to the sector over the last 2 to 5 years. So I'll carry that with saying that it's been well and truly turned over. Look, the first is on sector discipline. You know, although there is Blue ocean currently in evidence. What we're seeing is buy now, pay later, they all sort of get along pretty well. They're not fighting each other. The reality at the end of the day is they operate in global markets. They have global competitors. And so, you know, if there was a predisposition to these businesses to go back to competing very heavily against each other, you could see irrational competition. And that would erode sector margins, net margins. And that's something that investors globally wouldn't love to see. And definitely the investors, as it wouldn't love to see it doesn't mean that they can still do well in that environment, but it's much better when they're all sort of acting a little bit cosy and getting along. So I think the first one to identify would be sector competition. I think that's somewhat limited. Just to add on that at the moment, because the cost of capital is so high at the moment, I think people do have to act rationally. And you'll see that continuing across all the emerging sectors technology, buy now, pay later in the line. So I think the first is sector oriented and just sort of the discipline there. The second would be on the macro side of things. So you know, these businesses do credit. They do have leverage to retail sales. They do have leverage to transaction volumes and the like. Now there's typically merchants who want to offer these products usually get a higher basket size. You get better conversion and you get more revenue through the door. That's what every retail merchant wants. And so they are happy to offer it. But on the flip side of things, on the credit side of things, these guys have debts. They have bad debts that could occur and they have interest costs associated with what they're doing. So I mean, very significant changes in the macro environment where we saw, you know, like unemployment rising at a healthy clip. These are things that are typically associated with higher levels of bad doubtful debts. And that could adversely affect both the profitability, but probably also the sentiment. Right now, what we're seeing globally is very low levels of unemployment whilst inflation remains high. You know, the reality is that, everyone's sort of tracking along pretty well and we haven't seen any interest rate cuts just yet. They're not. I don't think there is on the horizon. But, in the context of things, if you saw a significant decline in credit quality, that would be something that you should be watchful of in the sector because it could affect the margins and really the sentiment in the sector. Nobody likes investing in financial businesses when credit starts to go bad. Because credit investors do have a senior position in the capital stack of all these businesses above the equity investors. 

Bryce: [00:36:41] So, Jono, I just to close out, we want to ask about what it looks like over the next ten years. Like where do you think it could get to also the industry, we spoke earlier, in the episode about, you know, credit cards and where it, what it looks like relative to credit cards is are they just straying back towards a credit card model or, you know, how is the industry going to play out? And I guess everyone listening is going to be wondering, like, is it ever going to hit the heights of 2021? 

Jonathan: [00:37:13] Well, it depends if you're talking about, you know, the, the size of the business or, you know, potentially the share price. I mean, the two different questions. You know, the height in 2021 had, you know, for all the competitors in the space, lesser issues of shares, they were priced on EBITDA sales multiples that were ten times what they were today. You know, they were very much in an environment where capital was very much free. And so it would be difficult to see them trading to multiples like that again. But I think near term you could see the multiples of the sector probably expand by two times if they continue to get a tailwind, and that probably. And if we get interest rate cuts at some point, I suspect that, you know, that could accelerate. So I think in the near term you should expect really strong profitability potential, multiple expansion. And if we do get some interest rate cuts, people really flocked to the sectors that got leverage on it. In the longer term, in answer to your question, look, I mean, I think all these businesses in the next five years should be sort of 2 to 3 times their size. It's very rare to be able to say a sector that's got structural tailwinds. And then I think that's just based on their current product constructs and a little bit of iteration. Over the next ten years, I think that these companies, like I've always thought, should be the originators of credit across the world. I think that the credit to traditional credit card model is broken. It's expensive. I think it's reasonably predatory to customers in that it's designed to make you incur interest. And I think things like fintechs and fintech businesses are well placed to be the originators of choice. And I draw parallels to things like mortgage brokers. The reality is everyone can. Anyone who can offer you a mortgage, you don't really mind where it comes from. A mortgage broker will do it quicker, better, faster and offer you a better rate. Buy now, pay later should be the same across all personal credit and so that should be paying for that should be going and getting a personal loan, potentially doing a car loan or maybe even providing a reference on your mortgage. So these are the next ten years because they're just much better at doing it. And for the banks, it makes sense. They can finance it. They don't have to have the thousand branches or whatever it may be. They're going to have the cost base. They deal with one counterparty instead of 2 million counterparties. So, you know, the proposition in fintech remains whether they get there in ten years or they're snaffled up by the major banks as part of that, I'm not sure. I suspect we do see sector consolidation over the next 12 months is now their businesses cast their eyes towards growing post, shrinking and consolidating. You know, Zip, for example, has probably the lowest multiple in the sector. It would look very comfortable inside one of the larger major peers in the US and would, you know, effectively be a rounding error and in the context of their market cap. So I think be positive in the short term, being watchful across the environment. And really, I think we're still remain at a very low level of penetration. And I think we should expect the sector continue to perform. There's really only been two years in the whole sectors life where it's performed poorly, and that was during interest rates going up at their fastest pace in the last 40 years. And so I think give it a pass and you know, just give it a pass on. That would be my view. 

Alec: [00:40:01] Yeah. It is fascinating. The numbers about credit card penetration even today are just crazy. I was just looking them up. It's like more than one per household in Australia. It's something like 80% in the US of have a credit card. It's just it's crazy. So there's opportunity there and we can't wait to see how it all plays out. But, Jonathan, thank you for joining us today. We really appreciate it. And as this Zip story plays out, I'm sure we'll be getting you back on to talking about it more.

Bryce: [00:40:27] To the moon. 

Jonathan: [00:40:30] Excellent. Thanks very much for your time. Bryce and Alec. Cheers. 

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