Are Zip shares finally worth buying now?

Can the buy now, pay later thrive in the new world of credit checks and an economic downturn?

| More on:
A man sitting at his dining table looks at his laptop and ponders the CSL balance sheet and the value of CSL shares today

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does it shock you to hear that the Zip Co Ltd (ASX: ZIP) share price is down only 2% over the past 12 months?

The buy now, pay later stock (BNPL) has certainly broken many hearts in recent years, losing 96% of its value since February 2021.

But seeing that calm over the past year could make one question whether it's now hit the bottom and is ready to climb again.

Is it a true bargain buy or is it a trap?

Shaw and Partners portfolio manager James Gerrish answered this question recently:

Going to market with cap in hand

One big question for investors is the impact of the federal government's decision this year to finally classify buy now, pay later services as a credit product.

Will the more stringent regulatory requirements be beneficial for Zip or will it kill the BNPL concept?

Gerrish, in a Market Matters Q&A, said Zip is well placed.

"They already have credit checks in place which puts them in a decent position."

However, for Gerrish's team, there is still much uncertainty around how the sector would endure tougher economic times.

Created with Highcharts 11.4.3Zip Co PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

"These BNPL models have not been tested during a recession, and we're not that sure how they will perform from a bad debt perspective," he said.

"While on the other side, they need continued funding to grow, which becomes more expensive and harder to get."

Indeed, last week Zip went to market seeking a $25 million equity raising.

"The company is also looking to restructure its liabilities, which will see the convertible note holders taking a significant haircut — i.e. a debt of $330 million falling to $137.8 million. Ouch!"

Which way will the Zip share price head? 

With all this mystery around its future, Gerrish can understand Zip shares could easily go in either direction.

"We can see Zip being a bit of a binary bet," he said.

"It may rally multiples of where it is today if they can walk [the] tightrope."

Ultimately, his team would not buy right now.

"However, for us, we've been burnt on Zip in the past and we would want to see tangible evidence that the model can handle more external pressures and remain viable."

Motley Fool contributor Tony Yoo 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 Zip Co. 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.

More on Broker Notes

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Broker Notes

Morgans names 3 ASX stocks to buy

The broker is feeling very positive on the investment opportunities here.

Read more »

Cheerful businessman with a mining hat on the table sitting back with his arms behind his head while looking at his laptop's screen.
Broker Notes

Macquarie tips 50% upside for this ASX 200 miner, and it's not BHP!

Unheralded miner poised to surge?

Read more »

A woman sits on sofa pondering a question.
Broker Notes

Guess which ASX All Ords media stock Macquarie expects to rise 17% over the next 12 months?

The broker is expecting big things from this media company.

Read more »

A couple stares at the tv in shock, one holding the remote up ready to press.
Broker Notes

These ASX 200 shares could rise 20% to 35%

Let's see why these shares are being tipped to rise strongly from where they trade.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Broker Notes

Up 110% in 12 months: Why this ASX 200 stock can keep flying

Let's see what Bell Potter is saying about this high-flyer.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

A man in a dark blue suit walks through an airport past floor-to-ceiling windows with a Qantas plane flying in the distance
Travel Shares

Up 16% this year, does Macquarie rate Corporate Travel Management shares a buy, hold or sell?

Does the travel stock have further to fly?

Read more »

group of friends checking facebook on their smartphones
Broker Notes

Macquarie tips 22% return for this ASX telco stock

This telco could be undervalued at current levels according to the broker.

Read more »