Why the Zip Co share price sank 11% lower today

The Zip Co Ltd (ASX:Z1P) share price is out of form on Thursday and dropping notably lower. Here's why the Zip share price is sinking…

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It has been a very disappointing day of trade for the Zip Co Ltd (ASX: Z1P) share price.

In afternoon trade the Afterpay Ltd (ASX: APT) rival's shares are down 8% to $6.04.

At one stage the Zip share price was down as much as 11% to $5.86.

Why is the Zip share price tumbling lower today?

Investors have been selling the company's shares on Thursday after they were the subject of a broker note out of UBS.

According to the note, following the release of its fourth quarter update, the investment bank has downgraded Zip's shares to a sell rating with an improved price target of $5.70.

Although UBS was impressed with its sales growth during the fourth quarter and FY 2020, it appears a touch concerned by a rise in its net bad debts.

During the quarter, Zip's net bad debts lifted to 2.24% from 1.84% in the third quarter and 1.63% from the same period last year.

Though, it is worth noting that management highlighted that its arrears metric is declining. As this is a leading indicator for future bad debts, it could be a sign that its net bad debts have now peaked.

Nevertheless, in light of this and its strong share price gain over the last few months, UBS doesn't see enough value in its shares to offer a sufficient risk/reward for investors.

Morgans remains bullish.

One broker that remains bullish and sees the Zip share price weakness as a buying opportunity is Morgans.

According to a note out of the broker this morning, it has retained its add rating and lifted the price target on its shares to $7.20.

This price target implies potential upside of approximately 19% over the next 12 months from the current level.

Should you invest?

It's impossible to say where the Zip share price will go over the next few months, but I'm confident that over the long term it will go notably higher from here.

As a result, if you're prepared to make a long term investment, then this share price weakness could prove to be an excellent buying opportunity.

James Mickleboro has no position in any of the stocks 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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