Why is the Zip Co share price stumbling today?

Posted: 20 January 2022 1:00 pm
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Shares in BNPL provider Zip Co are down nearly 48% over the last 6 months.

Buy now pay later operator Zip Co Ltd (ASX: Z1P) is among the top traded shares on the ASX, but the stock is not having a great day. It's down nearly 2% to $3.58 in early trading on Thursday.

Why is the Zip stock price in the spotlight today?

Zip Co on Thursday released a trading update for the December quarter and the numbers should have been reassuring to investors and analysts.

The largest pureplay BNPL operator on the ASX, after bigger rival Afterpay (ASX: APT) suspended trading on the ASX ahead of its merger with US payments giant Block (NYSE: SQ), reported a 58% year-on-year increase in quarterly revenue to a record $167.4 million.

Quarterly transaction volumes surged 85% year-on-year to a record 22.4 million, customer numbers on its platform jumped 57% from a year ago to 9.9 million, while the number of merchants rose 110% to hit 81,800.

“Some solid growth in the quarter as Zip delivered another very strong set of numbers,” Zip CEO Larry Diamond said in a statement to the ASX.

“The growing contribution from expansion markets is pleasing and should continue to build in the medium term in line with Zip’s global strategy. Despite external noise and challenges the business continues to deliver and we are very well placed to continue the growth and momentum in 2022,” he added.

But discerning investors have detected a gradual slowing down of business, a trend that analysts expect to continue amid the threat of rising interest rates and greater regulatory scrutiny.

Zip Co had recorded an 89% year-on-year jump in revenue in the September quarter, while transaction volumes had more than doubled from a year earlier.

Growth concerns

In its core Australia and New Zealand operations, quarterly revenue growth was stable at 45%, although transaction volumes slowed to 40% despite a peak season shopping frenzy as COVID infections hit retail trading.

Meanwhile, Zip Co saw net bad debts rise to 2.83% from 2.44% 3 months earlier.

The company said this is in line with management expectations but analysts have been voicing concerns about this aspect for the BNPL sector as a whole.

The company had reported a nearly 8-fold surge in marketing costs at the time of its full year results in August, and although no such details were available in today’s update, that trend is expected to continue this year.

On Thursday, Zip also outlined that it has completed significant work on launching a physical card in the key US market, where it is competing hard with Afterpay and Affirm to increase in-store penetration, a move that is certain to result in a near term rise in operating costs.

This has been a major overhang on Zip Co shares, which have lost nearly 50% of their value in the last 6 months.

Meanwhile, other sector stocks like Sezzle (ASX: SZL) and Splitit (ASX: SPT) were also down between 2.5% and 7%.

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