Why is the Zip Co share price continuing to slide?

Posted: 7 April 2022 1:51 pm

Shares in the BNPL operator are down nearly 12% in the past month.

Shares of buy now pay later operator Zip Co Ltd (ASX: Z1P) have lost more than 80% of their value over the last year, but there seems to be no end in sight for its long suffering investors. The stock was down another 2% to $1.45 in early trading on Thursday, and is heading towards its all-time low of $1.40 a share.

Why is the Zip stock price dropping?

Some of the blame for the slide in the Zip Co stock price, and fintech stocks in general, is because of the fresh sell-off in technology stocks on Wall Street. The sector was one of the worst performers as investors have fretted afresh about a faster-than-anticipated monetary policy tightening by central banks around the world to control inflation.

The US Federal Reserve is expected to raise interest rates further at its next meeting, and also reduce its balance sheet. Traders are betting that Australia's own Reserve Bank will hike rates as early as June.

All of this will make valuations for growth stocks such as BNPL players unattractive at current levels and so we are seeing a correction. Locally listed shares of US payments giant Block (ASX: SQ2), which now owns Zip's larger rival Afterpay, are also down 4% on Thursday.

This is happening at a time when investor sentiment in the BNPL sector has suffered a meltdown as investors come to terms with the headwinds facing the sector.

None of the key players, including Zip, are profitable yet and the situation is made worse by rising competition by the likes of PayPal, Apple and Australia's Commonwealth Bank on the one hand, and rising regulatory scrutiny in some of the biggest markets on the other.

Merger woes

Meanwhile, Zip Co is also grappling with the fallout of its acquisition of smaller US-focused rival Sezzle (ASX: SZL) in an all-stock deal.

The Zip-Sezzle deal is expected to deliver immediate scale and enhanced growth, particularly in the key US retail market. But under the deal, Sezzle shareholders will receive Zip shares at an implied premium, while Zip Co is raising fresh equity to part fund the "transformational" deal.

The company successfully issued shares worth $148.7 million to institutional investors recently at $1.90 each. It was supposed to raise another $50 million through a share purchase plan for retail shareholders, but fell way short this week, managing to raise around $23.98 million at just $1.48 a share.

That indicates significant concern among shareholders that the stock price will decline further. Indeed, analysts themselves are split on the path for the Zip Co stock. While Morningstar has a fair value estimate of $4.14 a share, UBS analysts have recently cut their price target to $1 a share, implying further downside.

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