“Even if you saw us as a direct comparison to Sezzle, we would seem undervalued, and I think one of the opportunities for us as we go into the market this year is to close that valuation gap.
“So we’re hoping to get a reassessment at some point, which should help the share price.”
Afterpay shares hit a record high of $ 149.78 on a valuation of around $ 42.5 billion on Thursday, with gains of 334% in the past year. Zip closed 23% higher at $ 7.36 (a valuation of $ 4.1 billion) and a relatively modest gain of 83% from a year ago.
Mr. Gray is right about the valuation spread, as in the December quarter Afterpay posted a total transaction value (TTV) of $ 4.1 billion compared to Zip’s $ 1.6 billion, and the two companies benefit from similar merchant expense margins.
Although Afterpay’s TTV is only 2.6 times that of Zip in the December quarter, Afterpay is 11 times more valuable.
Affirm and Zip both offer longer loans than Afterpay, but Affirm’s multiple is comparable to Afterpay’s.
Longer payment times
“In the Australian market, there has certainly been less appreciation for longer-term debt. Affirmer’s listing in the United States shows that American investors actually appreciate longer-term debt that is delivered over time. ‘a new way,’ Gray said.
“So Affirm would be a bit more similar to Zip in that it has longer payout periods available to its consumers, so its receivables don’t necessarily recycle as quickly as Afterpay, but they do receive similar multiples. . “
If Zip were valued at a multiple similar to Afterpay’s 10-times quarterly TTV (as the closest proxy to revenue), its share price would be $ 28.90 on a valuation of $ 16 billion, versus $ 7.36 today on a valuation of $ 4.1 billion.
In the United States, we deliver a unit economy that is significantly higher than our competitors.
– Peter Gray, Zip co-founder
For investors in the industry, value is a hot potato and Mr. Gray is probably correct in suggesting that investors prioritize Afterpay because it has the shortest debt books (only offering loans on fixed periods of eight or 10 weeks).
The faster a company renews its receivables while receiving merchant commissions, the higher its return on invested capital as a measure of profitability.
Likewise, companies that offer larger and longer loans, say over six months, are likely to have a higher credit risk because a debtor is more likely to default in six months than in eight weeks.
Afterpay also often boasts that the faster turnover of receivables gives it more opportunities to adjust credit parameters.
On the flip side, Zip still performs more comprehensive credit checks and saw its net bad debt as a percentage of TTV fall to 1.93 percent in the December quarter, from 2.43 percent in the previous quarter.
Mr. Gray is keen to stress that Zip seeks growth, but not at the expense of the deteriorating unit economy, as it also seeks profitability.
“In the United States, we deliver a significantly higher unit economy that all of the competitors, even though it is a very competitive market there, there has been no pressure on margins or costs to date in the United States, ”he said. -he declares.
It’s also worth remembering that pioneers in new industries like Afterpay, rightly or wrongly, tend to get higher valuations.
Overnight, Netflix set a new record, while streaming challenger Disney trades on a much lower multiple. The first benefit is another intangible, comparable to the main husky, where investors see it as the strongest until they receive proof to the contrary.