Why did the Zip (ASX:Z1P) share price have such a lousy month in October?

a boy with sad eyes pulls the zip over his mouth and nose while doing up a large jacket where the collar stands up at head height.

As it turns out, not too many ASX shares enjoyed a great month over October. The broad S&P/ASX 200 Index (ASX: XJO) went backwards by around 0.1% over the month just gone, with ASX resources and banking shares dragging on the ASX 200. One ASX 200 share that was particularly disappointing for investors though was the Zip Co Ltd (ASX: Z1P) share price.

Zip shares certainly had a month to forget. This buy now, pay later (BNPL) share started October at a price of $7.06 a share. But it ended up finishing the month at just $6.50 last Friday. That’s a slide of 7.93%. Ouch.

So what went so wrong for Zip over October?

Zip share price falls despite record quarterly update

Well, the centrepiece of Zip’s month was the first quarter update the company posted on 18 October. In this update, Zip told the markets that it managed to bring in a record quarterly revenue of $126.8 million, up 89% year on year. It’s quarterly transaction volume also broke records, coming in at $1.9 billion, up 101% year on year.

The company now has a customer base of 8 million, up 82%. While the number of merchants using its platform also continues to skyrocket, hitting 55,200 over the quarter, up 71%.

Despite an initial share price pop of roughly 5% when this update was released, investor sentiment cooled off very quickly in the days that followed. By Wednesday last week, the company was back below where its share price was on the day before this quarterly update was released.

Brokers and short sellers send some tough love for BNPL

This may have been spurred by some negative broker coverage of Zip that week. As my Fool colleague James covered last Tuesday, broker UBS evidently wasn’t impressed with Zip’s update. That’s given it retained a ‘sell’ rating on Zip shares with a 12-month share price target of $5.40. That implies a potential 12-month downside of close to 15% on today’s pricing. UBS pointed out that the Reserve Bank of Australia (RBA) is planning on removing the ‘no surcharge rule’ for BNPL products. The broker reckons this is an “incremental negative” for Zip Co.

As we covered last month, the RBA has indeed changed its tune on the no surcharge rules. These prevent retailers from directly passing on the higher transaction costs of BNPL payment methods to consumers. The RBA now won’t stand in the way of merchants wanting to apply a surcharge to BNPL transactions if they so wish. This, the RBA believes, will “promote competition and efficiency in the Australian payments system”.

These factors have certainly not hindered many investors’ scepticism of Zip Co. As the Fool covered last week, Zip shares remained in the top 10 most shorted ASX shares on the market.

All of these factors may have assisted in making Zip’s October one to forget. Investors in this buy now, pay later company will no doubt be hoping for a better November.

At the current Zip Co share price of $6.29, this company has a market capitalisation of $3.6 billion.

The post Why did the Zip (ASX:Z1P) share price have such a lousy month in October? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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