Is the Zip Co share price on the mend?

Posted: 23 March 2022 1:53 pm
News
Z1P-shares-23March_1800x1000_Finder

Shares in the BNPL operator have remained volatile but gained about 8% over the last week.

Shares of buy now pay later operator Zip Co Ltd (ASX: Z1P) have lost more than 80% of their value over the last year, and continue to remain volatile. But the stock has posted a net gain over the last week and was again among the top performers on Wednesday, up 5.6% to $1.61 at the time of writing.

Why are Zip shares higher?

Fintech stocks, including Zip, as well as locally listed shares of US payments giant Block (ASX: SQ2) (which now owns Zip's larger rival Afterpay) are faring well on the ASX thanks to a rebound in technology stocks on Wall Street.

Overnight, beaten down shares of technology and other big growth companies rebounded in the US market as investors saw bargain hunting opportunities after heavy recent losses following the US Federal Reserve announcing its first rate increase since 2018.

The improved sentiment comes at a time when markets are coming around to the view that the BNPL sector will continue to see strong growth despite the interest rate increases and continuing losses for most players.

Even though the sector has more than doubled over the last few years, BNPL currently accounts for only 2.9% of global ecommerce spending. According to a recent note from RBC Capital Markets, the sector will deliver a compound annual growth rate of 30% until 2025 to hit a total spending of about US$440 billion.

That would certainly benefit major players like Afterpay and Zip, and likely result in these companies eventually turning over profits.

Expanding scale

BNPL firms have been focused on expanding their geographic scale in the last 2 years, best demonstrated by Block's recent acquisition of Afterpay. Even Zip Co, which previously acquired US-based QuadPay, underlined its growth focus by announcing its acquisition of smaller US-focused rival Sezzle (ASX: SZL).

The Zip-Sezzle deal is expected to deliver immediate scale and enhanced growth, particularly in the key US retail market. The integration will likely result in $60 million to $80 million in synergies through lower employee costs and bringing the operations under a single platform.

Another $40 million to $50 million will come in revenue and margin synergies as the 2 companies combine their large customer base and merchant deals. The deal also gives the group a size advantage amid the looming consolidation in the BNPL sector.

Analysts are currently split on the path for the Zip Co stock. While UBS analysts have recently cut their price target to $1 a share, others like Ord Minnet and Morgans believe it should be $4 and $3.94 respectively. Morningstar has a fair value estimate of $4.14 a share on the stock.

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Think Zip Co or Block shares are a buy?

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