Today was meant to herald a sigh of relief for the Zip Co Ltd (ASX: Z1P) share price after a sharp 12% decline this week.
The Nasdaq Composite (NASDAQ: .IXIC) finished 3.69% higher overnight and United States buy now pay later (BNPL) giant, Affirm Holdings Inc (NASDAQ: AFRM) also rebounded 7.20% higher.
Despite the Zip share price opening as much as 6% higher today, its shares are now down nearly 3% at the time of writing. This compares to the Afterpay Ltd (ASX: APT) share price which is still trading around 7% higher. A sell rating released by UBS today could be to blame.
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UBS downgrades Zip share price from neutral to sell
UBS noted that Zip's growth had surpassed Afterpay in the first half and remained positive about the company's short-term growth potential.
Despite the positives, the broker was concerned about Zip's significant execution risks and mounting capital requirements.
The broker could be pointing to the fact that Zip had only launched in the United Kingdom in December 2020, some two years behind rival Afterpay. It could also be highlighting differences such as Afterpay's pending regulatory approval to launch into Spain, France and Italy, compared to Zip's two minority investments in BNPL players in Eastern Europe and the United Arab Emirates.
Zip currently finances its growth in customer receivables via its asset-backed securitisation program. The company is likely to require additional external funding to support receivables growth.
UBS highlighted that higher bond rates could also affect the cost of funding and the company's valuation. In Zip's half-year results, the company noted that the weighted average interest rate on loans outstanding at 31 December 2020 was 3.9% compared to 3.7% at 30 June 2020. Benchmark US bond yields were sitting at the 0.90% levels in December 2020 compared to the 0.70% levels in June 2020.
PayPal to launch BNPL in Australia
In other news that could be dragging on the Zip share price, PayPal (NASDAQ: PYPL) has announced it will be bringing its successful 'Pay in 4' BNPL product to Australia in the coming months. This comes after its launch in the US late last year.
Some other ASX-listed BNPL shares have also given back gains today including Sezzle Inc (ASX: SZL), Openpay Group Ltd (ASX: OPY) and Laybuy Holdings Ltd (ASX: LBY).
