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Why is the Zip Co share price seeing a rebound?


Shares in the BNPL operator are down 93% over the last 12 months.

Shares in buy now pay later operator Zip Co Ltd (ASX: ZIP) appear to be reversing course on the ASX.

After losing more than 90% of their value over the last 12 months, the stock has now risen for 2 sessions in a row. On Monday, it was up as much as 6% in early trade to 51 cents.

ASX-listed shares in US payments giant Block (ASX: SQ2), which now owns Zip's bigger rival Afterpay, was also up 5.5%.

What is boosting the Zip stock price?

The recent gains in Zip shares come on the back of news that smaller Australian BNPL rival Openpay Group (ASX: OPY) has halted operations in the United States just 4 months after describing it as the company's main growth market.

In a statement to the ASX on Friday, Openpay said the current economic and market conditions and "the likely ongoing capital investment required" had forced it to stop extending loans and cut most of its US subsidiary's staff.

It clarified that the expansion in to the US market had resulted in its losses widening by 65% in the first half and the company has not been able to find an investor to help fund its US plans.

Investors are likely expecting an identical but pragmatic decision by Zip, which in January announced a similar expansion into the US market through an all-stock acquisition of smaller US-focused rival Sezzle (ASX: SZL).

That transaction, which caused Zip to dilute its equity through a share issue at a discounted price, is yet to be completed. The integration is expected to cost another $60 million over 2 years, which will also likely add to Zip's already hefty December-end debt of $2.4 billion.

Changed conditions

Meanwhile, conditions have changed significantly since then, which means the cost and margin synergies expected from the Zip-Sezzle deal are at risk.

The BNPL sector recorded explosive growth over the last 3 years, but none of the players are yet profitable, and now face a reckoning as margins are squeezed.

Rapidly rising interest rates have directly hit prospects for these companies. As the cost of funds rise, it hits BNPL players hard due to their need to fund their interest-free payment offering in a business that already generates slim margins.

Investors are also turning away due to increasing competition and the prospect of much higher regulatory scrutiny. Tech giant Apple recently announced its move into the BNPL space, joining the likes of financial giant PayPal, and Australia's own Commonwealth Bank and NAB.

Afterpay and Zip Co are also among the 5 BNPL businesses facing increased scrutiny of their business practices as part of an inquiry by the US financial regulator. Similar regulatory scrutiny is also being implemented in the UK and Australia.

All of these factors mean that BNPL operators like Zip may have to wind back their expansion plans and focus on their core market in Australia, which is actually still doing quite well.

Proof that the sector is beginning to adjust to the new reality comes from news that Swedish BNPL giant Klarna is discussing cutting its valuation from US$46 billion a year ago to just US$6 billion now.

Shareholders, rocked by the slide in the value of their investment, would be hoping Zip takes a similarly pragmatic approach.

Think Zip Co shares are a buy?

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