‘Strategic sense’: What brokers are saying about the Zip (ASX:Z1P)-Sezzle deal

The Zip Co Ltd (ASX: Z1P) share price is falling again on Wednesday.

In morning trade, the buy now pay later (BNPL) provider’s shares are down 3% to $2.00.

Why is the Zip share price falling?

The Zip share price has come under pressure today amid broad weakness in the tech sector following a poor night of trade on the Nasdaq index.

In addition, there has been a few question markets raised over its decision to acquire rival Sezzle Inc (ASX: SZL).

Analysts at both Citi and Macquarie have given the deal a lukewarm response, with Citi highlighting that it is an expensive way to acquire customers.

Not everyone is negative on the deal, though. One leading broker that is largely positive on the idea of a Zip-Sezzle tie up is Morgans.

‘Strategic sense.’

Morgans believes the acquisition of Sezzle makes “strategic sense” and will put Zip in a “materially stronger position in the key US market.”

Its analysts explained: “Clearly, the Sezzle deal makes strategic sense for Z1P. The deal increases both Z1P’s global transaction levels (currently A$7.9bn) and customer base (currently 9.9m) by around ~30-35% respectively. It gives Z1P a materially stronger position in the key US market, with Z1P/Sezzle customer overlap being relatively contained (25%). A stronger product mix and enhance distribution channel mix are other benefits.”

And while it suspects that the market will remain sceptical on the synergies that Zip is suggesting it will unlock with the deal, Morgans doesn’t feel they are unreasonable.

The broker said: “We expect the market to remain sceptical on the revenue synergies in this deal, however, they do seem to have a logical basis, in our view, e.g. the potential to win more merchants with a larger combined customer base, and the ability of Sezzle customers to shop anywhere with Z1P’s app driving higher spend in new categories, etc.”

Morgans retains its add rating.

Morgans continues to believe that the Zip share price offers a lot of value for investors and has retained its add rating. And while it has slashed its price target down to $3.94, this is still almost double where its shares currently trade.

Its analysts said: “Clearly the global environment has changed for BNPL operators and for investors it’s now not a space for the faint hearted. We do, however, think the global growth opportunity remains large for companies that can execute in the BNPL space. The scale provided by the acquisition of Sezzle and a more considered growth agenda, could see Z1P be one of those winners, and with Z1P now trading on 2x revenue, we maintain our ADD recommendation.”

The post ‘Strategic sense’: What brokers are saying about the Zip (ASX:Z1P)-Sezzle deal appeared first on The Motley Fool Australia.

More reading

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• Why Dubber, Evolution, Sandfire, and Zip shares are dropping
• Leading brokers name 3 ASX shares to sell today
• Why is the Sezzle (ASX:SZL) share price falling following Zip’s takeover offer?
• ASX 200 (ASX:XJO) midday update: Zip shares tumble, AUSTRAC takes aim at Crown

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns 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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