The Zip Co Ltd (ASX: Z1P) share price has been one of the worst performers on the ASX in 2022. Is it so cheap that it’s now a bargain?
Zip is one of the larger global buy now, pay later players.
Zip’s share price demise
This year alone has seen a huge decline for Zip shares. The last 12 months show a drop of more than 80% for the BNPL company.
It has been rough, but is the worst over?
Zip is facing a number of headwinds.
For starters, investors seem to be turned off ASX growth shares. Rampant global inflation is leading to expectations that central banks are going to increase interest rates more than previously thought. The US Federal Reserve just started with a 0.25% increase and it’s expecting a few more increases over the rest of this year until the rate is between 1.75% to 2% by the end of 2022.
Higher interest rates are, theoretically, meant to lead to lower asset prices.
But for Zip, higher interest rates could be particularly difficult because interest is one of its major expenses. It’s unlikely that Zip can charge merchants any more, so a higher interest rate is likely to lead to a lower profit margin than the BNPL business has seen recently. There could also be higher bad debts, which Zip is already seeing.
Another key issue for BNPL is that some major competitors are now entering the space such as Commonwealth Bank of Australia (ASX: CBA) and PayPal Holdings Inc (NASDAQ: PYPL). Zip isn’t the only BNPL that has dropped heavily this year. Block Inc CDI (ASX: SQ2), Splitit Ltd (ASX: SPT) and Openpay Group Ltd (ASX: OPY) have all fallen hard.
What are some positive points?
It’s not all bad for the Zip share price.
Zip is working hard on getting to positive cash flow status, which would mean it’s able to rely on its own cash flow. Investors are less of a fan of unprofitable business these days. How much is a business worth if it’s making losses?
The company is still growing quickly organically. In the first half of FY22, group revenue rose 89% to $302.2 million and customers grew by 74% to 9.9 million. If it can become cash flow positive whilst still growing quickly, that will help the business. It still has an enormous growth opportunity in numerous countries outside of Australia including the US, India, the UK, Canada, Mexico, in the EU and in the Middle East.
Zip is also in the middle of trying to acquire Sezzle Inc (ASX: SZL) which will help grow its market share in the US.
Final thoughts on the Zip share price
It has fallen a lot. If the company is able to turn profitable then it could be a turnaround story. However, it seems Zip is going to be less profitable in the coming years, with more competition. It’s important not to anchor to a previous price, there is no rule that says Zip should bounce back to $5 or $6 this year. At this stage, it’s hard to say whether Zip is a bargain because of the uncertainty of its long-term profitability potential.
I’m not currently looking at the buy now, pay later industry for my portfolio.
