Why Zip Co Ltd (ASX:Z1P) share price is down 15% in one week

The second largest buy now, pay later (BNPL) player in Australia, Zip Co Ltd (ASX: Z1P) has lost a bit of shine in the past week as investors pummelled its shares down by 15% for the week. In today’s trading, Zip’s share price is down another 1% to $5.66 per share. 

How is Zip different to other players 

Firstly, Zip and Afterpay Ltd (ASX: APT) are technically in different sectors – with Zip categorised as a financial company, and Afterpay included as part of the ASX Technology Index (ASX: XIJ). However, they are competitors for all intents and purposes, as they offer similar services.

The biggest difference between Zip and Afterpay is in the way they earn revenues. Zip collects around 70% of its revenue from late fees incurred by its customers, whereas Afterpay earns 80% of its revenue from merchants. Zip also caters to a broader customer base, as it lets customers use its services at any merchant. In contrast, Afterpay only allows customers use its product at vetted merchant partners.

Zip’s business is also more diversified than other BNPL players as it focuses on expanding its addressable market. Its suite of products – Zip Pay, Zip Money, and Zip Business – supposedly provide a complete ecosystem experience for its customers.

Why did Zip’s share price fall 15% in the past week?

A few things have weighed on investors’ minds regarding Zip’s business. 

Firstly, the share price fall reflects the general perceived uncertainty surrounding the BNPL industry. Tighter regulations weigh heavily on the whole industry, even though Zip should be less adversely affected as it’s already regulated by the National Credit Act.

Analysts expect Zip’s margins to come under pressure as direct competition intensifies due to a low barrier of entry into the industry. Already we are seeing competitors entering this lucrative market. It’s also believed that Zip’s foray into the much larger overseas markets, especially the US through its recent acquisition Quadpay, may come a little too late to compete with Afterpay. 

Investors have also been concerned about the bad debts that sit on Zip’s books. Its bad debts ratio sits at 2.4%, significantly higher than Afterpay’s 0.85%, despite Zip conducting credit checks and collecting more information from its customers as required by the Credit Act. 

And finally, Westpac’s sale of $367 million stake in Zip last week after switching allegiance to Afterpay didn’t do a lot of good to restore confidence in the Zip share price.

What’s in store for Zip?

As mentioned, regulation and credit delinquency may be the most significant factors for Zip’s share price going forward. The key lies in its ability to navigate through the impending regulatory jungle, while also keeping tabs on its bad debt by employing strong credit risk management of its books.

More reading

• Where to invest $1,000 into ASX shares this week
• Meet Afterpay (ASX:APT)’s latest BNPL challenger
• 5 best performing large caps in 2020
• The Megaport (ASX:MP1) share price sank 16% lower in October: Time to buy?
• 3 reasons the Afterpay (ASX:APT) share price smashed the market in October

The Motley Fool contributor Eddy Sunarto has no shares in the companies mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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