Why has the Z1P share price rebounded today?

Posted: 25 January 2022 12:35 pm
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Shares in the BNPL operator Zip Co have tumbled 55% in the last 12 months but had a better day trading today.

Shares in buy now pay later operators Zip Co Ltd (ASX: Z1P) and Sezzle (ASX: SZL) are among the most traded shares on the ASX.

At the time of writing, Zip Co shares had jumped 3.7% at $3.40, while Sezzle shares rocketed 20% to $2.57. Smaller rival Splitit (ASX: SPT) was unchanged.

Why investors are cheering the Zip Co and Sezzle stock prices

Investors are cheering on the 2 BNPL companies after Zip Co confirmed it is in talks to potentially takeover its smaller rival.

That could create the largest pureplay BNPL operator on the ASX, after US payments giant Block (NYSE: SQ) replaced Afterpay on the local bourse following their merger.

In a statement to the ASX, Zip Co said current discussions are preliminary in nature and there is no certainty that they will result in a deal. It did not provide any details. Sezzle also confirmed the preliminary talks about a possible merger.

Zip Co said its board remains committed to ensuring that any transaction delivers value to shareholders and promised to be disciplined in assessing potential opportunities.

“It will only pursue transformational transactions that help accelerate the delivery of Zip’s broader strategic objectives such as enhanced scale in core markets, improved customer and merchant propositions and a faster path to profitability through significant synergy opportunities,” the company said.

Sector play

The market has long speculated about a merger between Zip Co and Sezzle but a confluence of factors seems to have put those discussions on a strong footing now.

Sentiment in the BNPL sector has weakened amid a ramp up in competition, with global financial giant PayPal, tech leader Apple and Australia’s top lenders CBA and NAB all announcing their entry in recent months, promising overcapacity in the market.

Investors have also been spooked by the looming interest rate increases in the US, which will flow globally. Technology shares, including those in the BNPL sector, typically see future cash flows discounted as interest rates rise.

This combined with the general lack of profitability in the sector has put pressure on share prices. BNPL stocks are down 30-50% over the last year, with valuations dropping 15-20% in the last month alone.

This comes at a time when concerns are also growing about rising regulatory risks facing the sector. Afterpay and Zip Co are among the 5 BNPL businesses facing increased scrutiny of their business practices as part of a new inquiry by the US financial regulator.

Similar regulatory scrutiny is also being implemented in the UK and Australia for BNPL operators.

Investors would be hoping a combination of Zip Co and Sezzle will put the entity on a stronger footing to face the coming challenges.

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