The last 12 months has been a very difficult time for the Zip Co Ltd (ASX: Z1P) share price after falling by 76%. What is the outlook for Zip in 2022?
For anyone that doesn’t know, Zip is one of the biggest buy now, pay later businesses in Australia. It operates in a similar way to Afterpay.
What’s happening to the Zip share price?
The buy now, pay later business is suffering a severe decline in investor sentiment. In-fact, the whole industry is suffering.
The potential for rising interest rates seems to be having a really negative effect. It’s true that higher interest rates should pull most asset values lower. But buy now, pay later operators are particularly sensitive to interest rates because interest is one of their biggest expenses. A higher rate could seriously impact the profit margins (and bad debts).
Investors also have justified concerns about the numerous competition in the sector. Yes, there are BNPL players like Sezzle (ASX: SZL), Block Inc (ASX: SQ2), Klarna and Affirm Holdings Inc (NASDAQ: AFRM). But much bigger local competition are muscling in like Commonwealth Bank of Australia (ASX: CBA). Paypal Holdings Inc (NASDAQ: PYPL) has also launched an offering.
Stronger competition could mean less volume growth and/or a need to reduce its merchant fee as a percentage of total sales.
There’s also a concern that regulation could be coming, which could lead to merchants being able to pass on BNPL fees to customers.
How is BNPL going to perform in 2022?
Investors are hoping that it won’t be as bad as 2021.
Some analysts may feel that the Zip share price has gone too far. It is processing billions of dollars of products and services for customers, which is one of the main factors supporting Zip and the share price.
I’m concerned that investors may be anchoring to the old Zip share price. Just because it has fallen hard doesn’t mean it’s entitled to return to that price any time soon.
Rising interest rates is quite a spanner in the works for Zip. However, the company’s enticing global expansion projects are looking good. It is now in a number of places like Europe, the Middle east, the USA and so on. Each of these markets look at least as compelling as Australia.
Is the Zip share price a good idea right now?
For contrarian investors, it could be a high-risk idea to consider. This week may include more volatility, but I believe that the business does have some positives that could see it recover some of the lost ground like volume growth, decent margins, brand awareness and global growth.
Buy now, pay later isn’t a sector I’m looking to add for my own portfolio. But, as one of the most popular ASX growth shares, I can see it might be a medium-term opportunity if it can keep growing volume.
