More reading

• How to invest in the Nasdaq Index on the ASX
• Revealed: 4 least profitable industries in Australia
• Why Webjet (ASX:WEB) got kicked out of ASX All Tech index
• Why the Austal (ASX:ASB) share price will be on watch today
• Is the new CBA BNPL service bad news for Afterpay and Zip shares?

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Kate O’Brien owns shares of Apple and Rio Tinto Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The four least profitable industries in Australia have been named, in a warning to investors who have ploughed money into ASX companies in those sectors.

Research firm IBISWorld revealed its analysis this week, noting that the named sectors are having a rough time in 2020-21 — but this may not necessarily mean losses will continue in future years.

Here are the four industries:

International airlines

With travel between countries at an almost standstill since the COVID-19 pandemic hit last year, it is no surprise that airlines are bleeding cash.

In the 2020-21 financial year, IBISWorld forecasts the average profit margin for the industry will sink to -31.4%.

“Revenue across the industry is expected to decline by 67.2% in 2020-21, as international tourist visitor nights have fallen by 82.6%,” said IBISWorld senior industry analyst Tom Youl.

“The industry is expected to begin a rebound next year, with revenue expected to rise by 78.4%, to $14.7 billion.”

In the latest reporting season, Qantas Airways Limited (ASX: QAN) recorded a $1.1 billion statutory loss after tax, while Air New Zealand Limited (ASX: AIZ) copped a 93% loss in earnings before taxation.

IBISWorld predicted recovery would take “several years” while vaccinations roll out around the globe.

Buy now, pay later

Players like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) have been ASX darlings in the past 12 months. But that still doesn’t make them profitable.

“Although the buy now, pay later industry is growing strongly, industry firms have made losses over the past 5 years and will likely continue to do so in 2020-21,” said IBISWorld senior industry analyst Yin Yeoh.

“While losses as a share of revenue are declining, the industry has yet to achieve profitability.”

IBISWorld predicts revenue will grow 25.8% for the industry this year but the average profit margin will sit at -2.6%.

The industry is also seeing more competition from broader financial institutions like Paypal Holdings Inc (NASDAQ: PYPL) and Commonwealth Bank of Australia (ASX: CBA), which this week revealed its own BNPL product.

But Yeoh was optimistic about the industry in the long run.

“While the industry continues to post losses, the scale of losses has shrunk significantly over the past two years,” she said.

“It is likely that the industry will achieve profitability for the first time before 2023-24.”

Wired telecommunications network operation

The wired telco sector, dominated on the ASX by Telstra Corporation Ltd (ASX: TLS), is one of the largest loss-makers in the country, according to IBISWorld.

The industry copped an average profit margin of -25.7% for the 2020-21 year.

IBISWorld senior industry analyst Liam Harrison placed the blame on government-owned NBN Co.

“‘NBN Co Limited’s industry-related revenue has risen at an annualised 68.2% over the 5 years through 2020-21, vastly outperforming the wider industry,” he said.

“However, the company has registered stronger losses over the past five years, largely due to the high costs involved in financing the NBN rollout.”

The sector is suffering from a multi-year downward spiral, with revenue declining 4.7% per annum over the past 5 years.

“NBN Co has been able to sustain its losses largely due to its public backing. However, it will need to achieve profitability eventually,” said Harrison.

“There are increasing threats to its profitability, including the roll-out of 5G fixed wireless networks that may erode NBN’s user base.”

Cotton ginning

Ginning is the process of separating fibres from the seeds on harvested cotton.

Severe drought across the country in the season leading up to the current financial year has meant revenue will go backwards to the tune of 26%.

The average profit margin for the sector will end up at -4.5% for the year.

However, Youl predicted better times ahead as water availability has improved in the past 12 months.

“Assuming a return to near-average annual rainfall, industry revenue is projected to increase from a low base over the next 5 years,” he said.

“Wide profit margins in the cotton growing industry are expected to encourage farmers, particularly irrigators, to grow cotton when water availability increases.”

More reading

• Is the new CBA BNPL service bad news for Afterpay and Zip shares?
• 2 quality ASX dividend shares with generous yields
• 5 things to watch on the ASX 200 on Thursday
• Is the Zip (ASX:Z1P) share price a buy now or buy later?
• ASX 200 dips, CBA launches BNPL, Fonterra reports

Tony Yoo owns shares of AFTERPAY T FPO, PayPal Holdings, and Qantas Airways Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Webjet Limited (ASX: WEB) will be removed from the S&P ASX All Technology Index (ASX: XTX) on 22 March.

This means that a business with a $2.1 billion market capitalisation will be missing from the most prominent index of Australian technology companies.

Webjet has been a success story in the local tech scene. The online travel agency was founded in 1998 then reverse listed on the ASX two years later.

The Webjet share price hovered around the 10 cent mark in mid-2005. But it spiked up to about $3.50 by 2013 as Australians started abandoning physical travel agents and embraced the lower prices from online merchants.

As that trend continued in the 2010s, Webjet’s valuation kept growing. The share price well surpassed the $12 mark in both 2018 and 2019, and the company now commands 50% of the online travel agency flights market in Australia and New Zealand.

But of course, COVID-19 brought the entire travel industry to a standstill last year. 

Webjet shares suffered a low of $2.25 during the 2020 market crash but have since recovered nicely to trade at $6.18 by close of trade Wednesday.

Goldman Sachs on Wednesday put a “buy” rating on the stock and slapped a price target of $7.36 on it, which is a 19% premium to the current cost.

So why is it getting kicked out of the All Tech index?

The reason Webjet was removed from the All Tech index

A spokesperson for S&P Dow Jones Indices, which operates the All Tech index, told The Motley Fool that Webjet’s industry classification will be changed.

“The global industry classification standard of WEB will be changed from ‘25502020 (Internet & Direct Marketing Retail)’ to ‘25301020 (Hotels, Resorts & Cruise Lines)’ effective on 22 March, 2021.”

This has led to Webjet’s exclusion, as the All Tech index doesn’t include the ‘Hotels, Resorts & Cruise Lines’ industry.

Webjet declined to comment to The Motley Fool on the reclassification.

The All Tech index encompasses the following industries:

• Information technology
• Consumer electronics
• Internet & direct marketing retail
• Healthcare technology
• Interactive media & services

Webjet’s fate means that index funds that follow the All Tech will be forced to sell out of the business in the coming days. The impact of that sell-off on the share price is yet to be seen.

The Webjet share price was down 0.32% on Wednesday, while it has risen slightly since the index removal was revealed after Friday’s trading session.

More reading

• ASX 200 down 0.6%: Telstra upgraded, Webjet rated as a buy, Westpac update
• Webjet (ASX:WEB) share price rises on bullish broker note
• 5 things to watch on the ASX 200 on Wednesday
• These are the 10 most shorted shares on the ASX
• ASX 200 unmoved, Flight Centre soars, Afterpay keeps falling

Motley Fool contributor Tony Yoo owns shares of Webjet Ltd. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Austal Limited (ASX: ASB) shares will be on watch today following the company’s announcement regarding a completed vessel delivery. By yesterday’s market close, the Austal share price had fallen 1.6% to $2.41.

Here is what the global defence shipbuilder announced on Wednesday night.

What could impact the Austal share price today? 

The Austal share price could be on the move today as investors digest the company’s latest update.

According to yesterday’s late market release, Austal has delivered its ninth guardian-class patrol boat to the Australian Department of Defence.

The vessel, named ‘HMPNGS Rochus Lokinap’, was gifted to the Papua New Guinea Defence Force under the Pacific Patrol Boat Replacement project. This took place during a certificate signing ceremony at Austal’s Henderson shipyard in Western Australia.

Austal stated that this is the second guardian-class patrol boat handed over to Papua New Guinea. In 2018, the company delivered the ‘HMPNGS Ted Diro’ as part of the Australian Government’s Pacific Maritime Security Program. Two more guardian-class patrol boats are in the pipeline for Papua New Guinea within the next two years.

The guardian-class patrol boats have an array of capabilities to support important mission objectives. These ships are built to be fast for seakeeping and can be retrofitted to mount machine guns or an autocannons if required. In addition, the boats have up-to-date electronics suites.

With these navy assets, Papua New Guinea will be able to conduct border patrols, regional policing, search and rescue, and other operations.

Austal CEO comments

Paddy Gregg, Austal CEO, commented on the company’s full service, and positive relationship between Australia and Papua New Guinea. He said:

Austal not only design and construct the Guardian-class, but also deliver a comprehensive training program to each crew accepting the vessels. Through this successful handover process, we are continuing to develop a very strong, productive relationship with the Papua New Guinea Defence Force and their crews.

More on the Pacific Patrol Boat Replacement project

The Pacific Patrol Boat Replacement project was awarded to Austal in May 2016. The shipbuilder was granted an additional contract option, taking the program to 21 vessels. In total, the value of the contract is estimated to be more than $335 million.

Twelve Pacific Island nations including Papua New Guinea, Fiji, Samoa, Vanuatu and others will receive the vessels through to 2023.

Austal share price review

The Austal share price has sunk by around 14% over the past 12 months and is down close to 10% year to date.

On current valuation grounds, Austal has a market capitalisation of about $866.5 million, with almost 360 million shares outstanding.

More reading

• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 recovers strongly, Austal floats higher, Fortescue drops
• Why Afterpay, Austal, Reece, & Service Stream shares are racing higher
• ASX 200 up 1.5%: Afterpay & Zip jump, Fortescue tumbles
• Here’s why the Austal (ASX:ASB) share price is storming 6% higher

Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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On Thursday Commonwealth Bank of Australia (ASX: CBA) announced plans to take on Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) with the launch of its own buy now pay later (BNPL) service.

According to the release, the banking giant’s BNPL offering will begin rolling out to eligible CBA customers from mid-2021 and be able to be used anywhere debit and credit card payments are accepted.

The service closely resembles the Afterpay product for shoppers. It allows them to make fortnightly instalments for transactions and comes with a limit of $1,000.

However, the service differs for merchants, as it carries no additional merchant fees above the standard merchant service fees. Whereas Afterpay and its peers also take a cut of the transaction as well.

CBA’s Group Executive, Retail Banking Services, Angus Sullivan, commented: “When making a payment, customers will have additional flexibility to use it for their everyday spending for smaller purchases as well as split over four instalments to help smooth payments for bigger purchases.”

“Additionally we know transaction costs are important considerations for businesses. Unlike some other BNPL providers which may charge a high fee, there are no additional fees to businesses when customers choose to pay with CommBank’s BNPL,” Mr Sullivan said.

Is this a threat to Afterpay and Zip?

The addition of another major player in the industry appears to have some investors concerned. Especially one with such deep pockets and a large customer base.

However, analysts at Goldman Sachs aren’t fazed by the news. It explained:

“While the headline would suggest competition is intensifying we do not believe it is likely to materially impede on APT’s market position. APT’s 3.4mn customers are transacting on average 18x per annum (1H21 annualised trends). And while merchants may benefit from a lower transaction cost, APT has likely aggregated a user base that is possibly different to the user base that CBA may appeal to. We also note that recent launches of Klarna and NAB no-interest credit cards have yet to have any noticeable impact on APT’s growth relative to our forecasts.”

In light of this, the broker has made no changes to its estimates or rating. It continues with its neutral rating and $127.60 price target on Afterpay’s shares.

More reading

• 5 things to watch on the ASX 200 on Thursday
• Is the Zip (ASX:Z1P) share price a buy now or buy later?
• ASX 200 dips, CBA launches BNPL, Fonterra reports
• Is the Commonwealth Bank (ASX:CBA) share price a buy or hold?
• How much have investors made (or lost) on Zip (ASX:Z1P) shares?

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The good news for income investors in this low interest rate environment is that the Australian share market has a large number of dividend shares offering generous yields.

Two that provide exactly this are listed below. Here’s why these ASX dividend shares could be the ones to buy:

Charter Hall Social Infrastructure REIT (ASX: CQE)

Charter Hall Social Infrastructure REIT is a real estate investment trust that has a focus on social infrastructure properties. Among its portfolio are properties with specialist use, limited competition, and low substitution risk. This includes childcare centres and government properties.

Demand for its properties has been very strong, leading to the company recently reporting an occupancy rate of 99.7%. Positively, these tenants aren’t going anywhere any time soon and are in for the long run. Charter Hall Social Infrastructure REIT’s weighted average lease expiry (WALE) stood at a sizeable 14 years at the end of the first half. Another positive is that the number of leases on fixed rent reviews has increased to 63.3%. This bodes well for its future rental income growth.

The company’s strong form this year means it is expecting to reward shareholders with a higher than planned 15.7 cents per unit distribution. Based on the current Charter Hall Social Infrastructure share price, this represents a 5.15% yield.

One broker that is a fan is Goldman Sachs. It currently has a conviction buy rating and $3.45 price target on its shares.

Telstra Corporation Ltd (ASX: TLS)

Another ASX dividend share to consider is Telstra. After several disappointing years caused by the NBN rollout, this telco giant looks ready to return to growth at long last.

Last month when Telstra released its half year results, the company’s CEO, Andy Penn, revealed that he has set some bold targets for the next couple of years. And pleasingly, he appears confident the company can achieve this thanks to industry trends and its T22 strategy.

Telstra is aiming for mid to high single-digit growth in underlying EBITDA in FY 2022 and then further growth in FY 2023. 

In light of this, the company’s dividend cuts appear to be over and 16 cents per share looks set to be the bottom. Based on the latest Telstra share price, this will mean a fully franked 5% dividend yield for investors.

Goldman Sachs is also a fan of Telstra. Its analysts currently have a buy rating and $4.00 price target on its shares.

More reading

• Top brokers name 3 ASX shares to buy today
• ASX 200 down 0.6%: Telstra upgraded, Webjet rated as a buy, Westpac update
• Leading brokers just upgraded these ASX shares to “buy” today
• Is the Telstra share price (ASX:TLS) a buy today?
• ASX 200 Weekly Wrap: Calm restored to the ASX 200

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re wanting to take advantage of recent weakness in the tech sector, then you might want to look at the ASX shares listed below.

Here’s why these ASX tech shares could be great long term options for investors:

Altium Limited (ASX: ALU)

The first ASX tech share to look at is Altium. It is a leading electronic design software platform provider exposed to the Internet of Things and artificial intelligence booms. The proliferation of electronic devices is expected to lead to increasing demand for its software over the next decade. Management certainly believes this is the case and has set itself bold growth targets over the coming years. It is also aiming to dominate its market and looks well-placed to achieve this thanks to its industry-leading technology. UBS recently upgraded its shares to a buy rating and put a $34.00 price target on its shares.

Appen Ltd (ASX: APX)

Appen provides and prepares the data that goes into artificial intelligence and machine learning models. This includes for some of the biggest tech companies in the world such as Amazon, Facebook, and Microsoft. Given the growing importance of artificial intelligence for businesses and governments, Appen has the potential to grow very strongly over the next decade. One broker that is positive on the company is Ord Minnett. Last month it upgraded its shares to a buy rating with a $24.75 price target. The broker believes recent weakness in the Appen share price has brought it down to an attractive level. Especially given its exposure to the global trend of investment in artificial intelligence.

NEXTDC Ltd (ASX: NXT)

Another tech share to consider is NEXTDC. It is a leading data centre operator with operations across Australia. It has also recently opened up offices in Singapore and Tokyo, with a view to expanding into these markets in the near future. If this proves to be a success, it could take its growth up another level. Looking ahead, NEXTDC appears well-placed to benefit from increasing demand for data centre services due to the structural shift to the cloud. Goldman Sachs is very positive on its future and has a buy rating and $13.50 price target on its shares. The broker has previously even suggested the NEXTDC share price could go as high as $20.00 based on bullish but not unrealistic assumptions.

More reading

• 2 of the best ASX growth shares to buy immediately
• 3 beaten down ASX shares that could be great value
• ASX 200 up 0.8%: Metcash update, tech shares rebound, PointsBet acquisition
• 2 outstanding ASX shares to buy and hold
• ASX 200 down 0.1%: Afterpay sinks, Evolution announces acquisition

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Appen Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Would Coles Group Limited (ASX: COL) make a dependable ASX share to buy right now for a portfolio?

The Coles share price sank after releasing its half-year result for FY21 – it has dropped by around 15% since 16 February 2021.

What was in the report?

It wasn’t as though Coles reported a loss for the first 27 weeks of the financial year.

Total sales revenue went up 8.1% to $20.4 million, total earnings before interest and tax (EBIT) rose 12.1% to $1 billion, net profit after tax (NPAT) rose 14.5% to $560 million and earnings per share (EPS) grew 14.5% to 42 cents.

Like most retail businesses, Coles is seeing a large increase of online sales. Coles saw total e-commerce sales go up 48%, whilst sales to household consumers grew 61%. Coles Supermarkets saw EBIT rise by 14.4%.

The liquor division actually had a standout performance, with revenue growing by 15.1% to $1.95 billion and EBIT growing 36.8% to $104 million.

Drilling down into the different metrics for Coles Supermarkets, it saw a 71 basis point increase of the gross profit margin to 25.8%. This improvement came about after strategic sourcing initiatives in its own brand as well as a more efficient supply chain, according to management.

Despite the worsening of the cost of doing business (CODB) percentage by 40 basis points to 20.7%, Coles was able to increase its EBIT margin by 31 basis points to 5.1%. There were approximately $70 million of COVID-19 costs during the period.

Over the half, Coles Supermarkets delivered comparable sales growth of 7.2%. There was inflation of 2.3% over the period, though it was only 0.7% when excluding tobacco and ‘fresh’.

A key focus of Coles is expanding its own brand offering. Own brand saw $5.7 billion of sales in the half, an increase of 9.8%. The most successful products were in the convenience and Christmas ranges.

Was the Coles share price hit by the outlook?

Coles warned that depending on COVID-19 and various impacts, sales in the supermarket sector may moderate significantly or even decline in the second half of FY21 and into FY22.

The supermarket business pointed out that it will be cycling against elevated sales from COVID-19 supermarkets late in the third quarter, for the rest of FY21 and most of FY22. Remember, Coles has benefited from pantry stocking, people working and eating at home, and customers shopping online to avoid physically shopping in-store.

However, Coles did say that its stores in larger shopping centres are likely to pick up again as customers return to those places. Increased movement could benefit fuel volumes as COVID-19 restrictions ease.

In the first six weeks of the third quarter, supermarket same store sales growth was 3.3% with online sales growth of 37%. Growth was stronger in liquor with comparable growth of 12.5%.

Is the Coles share price worth buying?

Whilst there aren’t that many buy ratings out there for Coles shares right now, the price targets suggest there’s quite a lot of potential growth.

For example, Citi doesn’t rate Coles as a buy – but its share price target is $19 which suggests it could rise around 20% over the next year. The broker was turned off by the higher costs and expectations of lower sales growth, or even a decline of sales.

Broker Morgan Stanley has a share price target for Coles of just over $20. The broker expects that growth is going to slow from here and it’s not expecting Coles to do as well as it previously thought over the next couple of years.

According to Morgan Stanley, Coles shares are trading at 22x FY21’s estimated earnings.

More reading

• 2 quality ASX dividend shares to buy today
• Why the Coles (ASX:COL) share price is still down 15% in 2021
• 2 ASX dividend shares to buy with yields above 4%
• ASX 200 Weekly Wrap: Calm restored to the ASX 200
• Will the ASX share e-commerce boom last?

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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On Wednesday the S&P/ASX 200 Index (ASX: XJO) was out of form and dropped lower. The benchmark index fell 0.5% to 6,795.2 points.

Will the market be able to bounce back from this on Thursday? Here are five things to watch:

ASX 200 futures pointing higher

The Australian share market looks set to push higher on Thursday morning following a positive night of trade on Wall Street. According to the latest SPI futures, the ASX 200 is poised to open the day 5 points or 0.1% higher this morning. In late trade on Wall Street, the Dow Jones is up 0.55%, the S&P 500 has risen 0.3%, and the Nasdaq is up 0.55%.

US Fed keeps rates on hold

The US Federal Reserve has sharply increased its expectations for economic growth but indicated that there will be no interest rate hikes until 2023 despite this and higher inflation. According to CNBC, the committee also voted to keep short-term borrowing rates steady near zero and will buy at least US$120 billion of bonds a month.

Oil prices drop

Energy producers such as Beach Energy Ltd (ASX: BPT) and Woodside Petroleum Limited (ASX: WPL) could underperform today after oil prices dropped. According to Bloomberg, the WTI crude oil price is down 0.25% to US$64.64 a barrel and the Brent crude oil price has fallen 0.45% to US$68.08 a barrel. This was the fourth session in a row of declines. Traders were selling oil due to rising US inventories.

Gold price surges higher

Gold miners Newcrest Mining Ltd (ASX: NCM) and Resolute Mining Limited (ASX: RSG) could be on the rise today after the gold price surged higher. According to CNBC, the spot gold price is up 1.05% to US$1,749.00 an ounce. The gold price climbed after the US Fed committed to not increasing rates until 2023.

Afterpay rated neutral

A note out of Goldman Sachs reveals that its analysts have held firm with their neutral rating and $127.60 price target on Afterpay Ltd (ASX: APT) shares following a deep dive into the buy now pay later sector. Goldman spoke very positively about the company, but continues to struggle with its valuation. It commented: “we believe relatively few players will dominate this sector in each market and flag that APT is showing the operational signs of being one of the key winners in this space (strong customer growth, merchant pipeline and frequency of use trends). […] However, valuation keeps us as Neutral.”

More reading

• ASX 200 dips, CBA launches BNPL, Fonterra reports
• 2 ASX investing strategies that could give young people an advantage
• Afterpay (ASX:APT) share price wobbles on CommBank BNPL news
• How this week’s Fed meeting could impact ASX 200 shares
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Zip Co Ltd (ASX: Z1P) share price has been pummelled in recent weeks, does that make it a buy now or buy later?

The Zip share price has actually fallen by almost 40% since 16 February 2021. That’s an even stronger decline than what has happened to Afterpay Ltd (ASX: APT) over the same time period.

Since the start of the decline, Zip has reported its FY21 half-year result, so let’s look at those numbers:

FY21 half-year report

Zip reported that in the six months to 31 December 2020 it delivered record transaction volume (TTV) of $2.3 billion, which was up 141% year on year. Zip said that this is now annualising at more than $7.5 billion as at December 2020.

The increase in TTV led to revenue growing by 130% year on year to $160 million – this is annualising at more than $480 million as at December 2020.

Zip said that it delivered positive cash earnings before tax, depreciation and amortisation (EBTDA) in the first half with cash gross profit margins increased to 54%. Management boasted that this demonstrated market leading unit economics whilst investing for global growth.

The buy now, pay later business completed its acquisition of Quadpay in August 2020, which operates in the US. It has grown its TTV by more than 130% in the four months since the deal was completed.

Zip said that the addition of Quadpay has delivered a step change in unit economics, revenue yield and capital efficiency for the company. Revenue as a percentage of TTV was 6.89%, the gross margin as a percentage of TTV was 3.71% and the blended book is now recycling every three months on average.

There was significant growth of customers, which went up 217% year on year to 5.7 million, whilst it ended with 38,500 merchants across the US, Australia, New Zealand and the UK.

Some of the latest merchants to sign up include Gamestop, Sunglass Hut, Harvey Norman Holdings Limited (ASX: HVN) and Adore Beauty Group Ltd (ASX: ABY).

What do brokers think of the Zip share price?

There’s quite a divergent view of Zip shares at the moment.

At one end there’s a broker such as Morgans which has a share price target for Zip of just over $12. Morgans thinks that Zip is growing strongly, especially in North America. However, it’s spending a lot to do it. The broker acknowledged that Zip is investing in a number of different areas, including new offerings for customers.

However, the brokers at Macquarie Group Ltd (ASX: MQG) have a much less rosy outlook for Zip shares with a price target of $5.70. Macquarie says that Quadpay has very good net transaction margins, however future competition may mean that the margin reduces over time. The broker is wary of the high valuation and the higher costs.

New competition in Australia

Zip is also going to have to come to terms with the fact that Commonwealth Bank of Australia (ASX: CBA) is launching its own buy now, pay later product. It will be able to be used anywhere that Mastercard is accepted.

There will be a limit of $1,000 and it’ll be repaid in four fortnightly instalments for transactions higher than $100.

CBA paid particular attention to note that the cost would be lower for merchants because there are no additional fees to businesses, just the standard merchant fee. Customers aren’t charged ongoing fees, just a late fee of $10 per missed instalment repayment – up to a cap.

Zip may need to react to this development to ensure continuing long term growth in Australia.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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