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Why is the Zip Co share price being so volatile this week?


Shares in the BNPL operator are down nearly 30% in the last month alone, but are bouncing around this week.

The last week has been a snapshot of the rollercoaster ride that investors in Zip Co Ltd (ASX: ZIP) have had to endure.

Shares in buy now pay later operator climbed more than 12% on Wednesday before sinking 5% on Thursday.

Even today, the stock is being volatile and was up 1 cent, or 1.8%. to 55 cents at the time of writing.

By comparison, ASX-listed shares in US payments giant Block (ASX: SQ2) – which now owns Zip's bigger rival Afterpay – were up 2.1% and have shown a clear recovery all through this month.

What is weighing on the Zip stock price?

This week has brought a fresh round of bad news for the biggest remaining pure play BNPL stock on the ASX.

UBS analysts on Thursday halved their price target on Zip Co shares to just 45 cents with a "sell" rating on account of rapidly rising interest costs and growing arrears as bad debt expenses rise.

They estimate that Zip's annualised bad and doubtful debts have risen to 12.4% in the first half of 2022 due to removal of pandemic-related economic stimulus and pressures in household spending, compared to 7.4% a year ago. As a result, they expect credit quality to remain soft in the current half year too.

That message will certainly add to the woes of shareholders who have already seen the value of their investment slide 93% in the last 12 months.

UBS says in order to attain profitability, Zip needs to achieve revenue and cost synergies with its still-to-be-completed merger with US-focused Sezzle (ASX: SZL), an improvement in credit performance, and organic growth – a tall ask for a company already struggling with high debt.

According to Refinitiv data, only 2 of the 8 analysts who still rate the Zip stock hold a "buy" rating on it.

Uncertain outlook

The longer term odds certainly seem stacked against Zip Co shares recovering ground with the company's growth aspirations grounded.

While a cloud hangs over its deal with Sezzle, Zip has announced it will be winding down its small-business lending operation Zip Business as well as closing down personal finance app Pocketbook.

While these decisions will not result in any immediate improvement of its finances, they are in line with more practical decisions by Zip's BNPL peers in recent days as the entire sector faces headwinds from the aggressive interest rate upcycle.

Last week, smaller Australian BNPL rival Openpay Group (ASX: OPY) halted its foray into the United States just months after launching them while Swedish BNPL giant Klarna raised funds that slashed its valuation from $US46 billion a year ago to just $US6.5 billion now.

Conditions have changed significantly for the BNPL industry over the last year.

With none of the Australian players as yet profitable despite 3 years of explosive growth, the slim-margin business model is being squeezed by their need to fund the interest-free payment offering amid rapidly rising cost of funds and cautious spending by consumers.

Investors are also turning away due to increasing competition and the prospect of much higher regulatory scrutiny.

And finally adding to their woes are the incumbents. 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.

Think Zip Co shares are a buy?

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