The Zip Co Ltd (ASX: Z1P) share price has dropped by around 50% over the past six months. Does this mean it’s a great opportunity now?
Buy now, pay later suffers
The entire buy now, pay later sector seems to be suffering at the moment.
The Afterpay Ltd (ASX: APT) share price has dropped 36% since the takeover bid by Square / Block (NYSE: SQ).
Another one, Sezzle Inc (ASX: SZL), has also seen its share price drop around 50% over the past six months.
Investors focused on how much profit a company makes, or may make, have often asked the question – how are BNPL players worth so much when nearly all of them make losses?
Growth is good, some businesses have used the ability to re-invest heavily for growth to excellent effect. Just look at what Xero Limited (ASX: XRO) and Amazon.com Inc (NASDAQ: AMZN) have achieved.
But there have been big questions about the valuation and long-term profitability of players like Zip.
Interest rates are now seemingly going higher, which in theory is meant to push down valuations, particularly for high-growth businesses. Zip and other BNPL also face difficulties from the fact that they pay interest on the money they borrow to then ‘lend’ to customers. If interest rates keep rising, it could wipe out the BNPL margins – it’s not like they can charge merchants even more, those fees are already deemed to be expensive It’s not surprising to me that the Zip share price has been falling.
Competition intensifies from the likes of big players Commonwealth Bank of Australia (ASX: CBA), Paypal Holdings Inc (NASDAQ: PYPL) and potentially even Apple Inc (NASDAQ: AAPL).
Zip and others may also suffer if merchants start being allowed to add surcharges to make customers pay for BNPL. If customers had to pay fees, it would make BNPL seem much less appealing. The US regulators are now also starting to look at BNPL.
My thoughts on the Zip share price
Whilst the problems are growing, investors shouldn’t forget that Zip is still growing quickly.
In November 2021, it saw record monthly transaction volume of $906.5 million – up 52% year on year. Based on November, transaction volume is now annualising at over $10 billion per year. Customer numbers were up 71% year on year to 9.2 million.
Zip now has a presence in a number of countries outside of the USA and NZ, including the UK, Canada, Mexico, Europe, the Middle East, South Africa and now Singapore.
If you have a long-term belief in Zip, then today could be an opportunistic time to jump on it. However, I’m not convinced it’s going to be as profitable as investors previously thought, so don’t anchor thoughts about a Zip share price recovery to where it has been in the past. Think about its value and future prospects from today.
