On Thursday, UBS revised the rating for Zalando SE (ETR:ZALG) (ZAL:GR) (OTC: ZLNDY) stock from Neutral to Buy, setting a new price target of EUR40.00, a significant increase from the previous EUR28.00.
The upgrade follows Zalando's reported revenue outperformance and Gross Merchandise Volume (GMV) upgrades, signaling a potential upgrade cycle for the online fashion retailer.
With a market capitalization of $7.71 billion and a robust gross profit margin of 40%, InvestingPro analysis suggests the stock is currently trading below its Fair Value, supporting UBS's bullish stance.
Zalando's pre-release of fourth-quarter results indicated a strong trajectory in profitability, with the adjusted EBIT for the fiscal year 2024 expected to surpass the upper end of the company's guidance. This performance has led UBS to predict a business-to-consumer (B2C) led turnaround for Zalando.
The company's strong financial position is evident in its EBITDA of $606 million and its healthy balance sheet, with InvestingPro data showing more cash than debt. Subscribers can access detailed financial health scores and 8 additional ProTips for deeper analysis.
UBS anticipates continued EBIT upgrades into the fiscal year 2025, underpinned by three key factors: a GMV compound annual growth rate (CAGR) of 6.6% to 2028, reflecting modest market share gains; an 8.1% GMV/Revenue CAGR for fiscal years 2025 and 2026, which could see further increases due to Zalando's market position and marketing efforts; and an EBIT opportunity arising from improved retail gross margins and Zalando Marketing Services (ZMS), along with better cost leverage from business-to-business (B2B) operations.
The analyst also noted the potential for mergers and acquisitions (M&A) involving the YOU platform, which could be accretive given the scale benefits in B2C and the B2B product suite, although this is not factored into the base case scenario.
Despite Zalando's shares experiencing a strong performance over the past year, with InvestingPro data showing an impressive 69.37% return, UBS's proprietary HOLT analysis suggests that there is room for further upside, given the company's improving cash flow return on investment (CFROI) profile.
Trading at a P/E ratio of 38.05, the stock shows promising growth potential, supported by analysts' expectations of increased net income this year. The upgrade by UBS reflects confidence in Zalando's continued growth and profitability development.
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