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:
Image source: Getty Images
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.
"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."
