The Zip Co Ltd (ASX: Z1P) share price is down another 5%. It’s getting smashed, but will it go back up?
What’s happening to the Zip share price?
It has been a painful month for the Zip share price, with it being down more than a third since 13 April 2021.
Zip isn’t the only one. There is a huge selloff of growth shares right now. Names like Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO) are also down heavily today.
For some time the worry has been that inflation could derail the ASX share market performance. If inflation is faster than expected, then it could force central banks to implement interest rate rises earlier than expected to keep things under control.
The market got an inflation update from the US overnight. US consumer inflation went up 4.2% in April 2021 compared to April 2020. This was apparently the biggest increase since the GFC. Month on month, there was an inflation increase of 0.8% – much higher than expected.
Time to sell at this Zip share price?
A small increase in the interest rate shouldn’t lead to such a huge decline of Zip’s intrinsic value. That suggests that the Zip share price may have been too high, or that some shareholders didn’t have a high conviction in the business in the first place.
Zip is facing a tricky environment right now. A rising interest rate would increase the interest expense for Zip over time. It can make a big difference to the profit and loss statement for an interest rate sensitive business like Zip.
Competition is rising. There a number of major competitors in the US like Afterpay, Sezzle Inc (ASX: SZL), Affirm, Klarna and so on.
In Australia the heavyweight Commonwealth Bank of Australia
(ASX: CBA) is planning to enter the buy now, pay later space.
If you’re bullish about Zip’s future then today’s share price of around $6.50 is much more attractive than when it was above $9.
Whilst I prefer Zip to Afterpay, I’m not convinced that they’re collectively going to be as profitable as the market was pricing them a few weeks ago. I don’t think the Zip share price is going to jump back to above $10 any time soon, particularly if interest rate rises get closer.
There’s also the fact that Zip is spending quite a lot on advertising to achieve the growth that it’s achieving. Profit is not close yet. There are a few other ASX growth shares I’d rather jump on.
