Top broker warns that the Zip share price could sink 43%

The Zip Co Ltd (ASX: ZIP) share price has run out of steam recently.

After rocketing higher in July, the buy now pay later (BNPL) provider’s shares have taken a tumble.

For example, since this time last week, the Zip share price has lost 13% of its value.

Where next for the Zip share price?

Unfortunately, one leading broker believes the Zip share price could be heading lower from here

According to a recent note out of Citi, its analysts have downgraded the company’s shares to a sell rating with a 70 cents price target.

Based on the current Zip share price of $1.23, this implies potential downside of 43% for investors over the next 12 months.

What did the broker say?

Although Citi believes that Zip’s plan to tighten its risk settings will reduce its bad debts, it expects this to come at the expense of growth.

In light of this, it feels that Zip may need to find further way to lower its costs to reduce its cash burn.

It explained:

While we expect net bad debts to decline as Zip tightens risk settings, we expect this to negatively impact TTV and have lowered our growth forecasts meaningfully and think Zip needs to make further cost cuts to reduce cash burn.

Given the risks to both transaction volumes and bad debts over the next 12 to 18 months in a tougher economic environment, we downgrade to Sell/High Risk.

The broker also criticised management’s very costly decision to pursue the acquisition of Sezzle Inc (ASX: SZL).

We also have some concerns on Zip’s decision making as the Sezzle acquisition process (which we had concerns on) resulted in Zip spending $60 million of capital. We continue to see value in Zip’s Australian business given its differentiated offering (albeit with higher credit risk), but see the US business as lacking scale.

The post Top broker warns that the Zip share price could sink 43% appeared first on The Motley Fool Australia.

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More reading

• Does this signify more bad news for ASX BNPL shares like Zip?
• Why is the Block share price tumbling 5% on Wednesday?
• Could Afterpay’s global ambitions threaten the future of Zip shares?
• These are the 10 most shorted ASX shares
• Did Zip really outgrow former ASX favourite Afterpay in the June quarter?

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. has positions in 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 Scott Phillips.

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