The big dipper: Why has the Zip share price slipped 36% in a month?

Are investors beginning to grow nervous of what 'higher for longer' interest rates could mean for Zip?

| More on:
illustration of laptop with down arrow and the word zip representing zip share price going down.

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

It's been a shocking past month for the Zip Co Ltd (ASX: ZIP) share price, placing it within the top 10 worst-performing stocks inside the S&P/ASX All Ordinaries Index (ASX: XAO) during this period.

While the benchmark tip-toed 2% lower, shares in the buy now pay later (BNPL) provider descended 36.9% to 26 cents during a tough month of trading. The pain was shared by fellow fintech company Block Inc (ASX: SQ2), seeing its share price widdled away by 9%.

Although, the difference between a 9% and a 37% decline is stark. So, why is the market slapping Zip with repetitive 52-week lows this last month?

Will high rates linger?

The Zip share price is feeling the pinch again today, with shares sliding 7% in afternoon trade. Yet, the company has not announced price-sensitive information since its FY23 results update on 29 August.

The only recent news to note is the company's partnership with payment automation provider Primer. In the absence of 'big news', investors could be responding to macroeconomic jitters.

Zip is heavily exposed to interest rates due to the nature of its business model. When someone checks out with a buy now, pay later solution, Zip taps a loan from a bank to facilitate the transaction.

The company needs to earn enough to repay the bank (with interest) through its merchant fees and other charges. This means the unit economics is exposed to shifts in interest rates, given it is a direct cost of doing business.

According to its preliminary report, Zip incurred an interest expense of $159.6 million in FY23 — increasing 116.2% from $73.8 million in FY22.

The BNPL player is quick to note that the increase represents only 1.8% of underlying volumes, compared to the previous 0.9%, due to "increases in base rates across all markets in which Zip operates." However, let's look at the portion of the company's revenue this expense is consuming:

  • FY23: 23% of revenue consumed by interest expense
  • FY22: 12.4% of revenue consumed by interest expense

Clearly, interest rates can have a large impact on the earnings potential of such a business.

Unfortunately, warnings of higher for longer interest rates have been made in recent days, potentially impacting the Zip share price.

For example, JBWere chief investment officer Sally Auld believes services inflation remains sticky. In an address at a Property Council of Australia event, Auld said:

The best we can hope for is that rates don't go up any more… They're not going lower any time soon.

Considering the enlarged cost high rates bear on the Zip business, investors might be taking heed.

Unchartered waters for the Zip share price

Providing the double whammy, market onlookers are becoming wary of what a weak economy could mean for delinquencies.

In the United States, late payments on credit cards are rising swiftly. Moreover, smaller US banks are seeing late payments reach an all-time high.

Fitch Ratings analyst Michael Taiano believes it could be culminating into a 'toxic brew of concerns', stating:

You have an industry with a higher concentration of subprime borrowers in a market that hasn't been effectively tested through [this type of economy], and you have a kind of a toxic brew of concerns.

While Zip reported reduced bad debts and expected credit losses in FY23, the market is keeping its eyes on what may lie ahead for the Zip share price.

Motley Fool contributor Mitchell Lawler has positions in Block. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Block and Zip Co. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on 52-Week Lows

A businesswoman exhales a deep sigh after receiving bad news, and gets on with it.
52-Week Lows

Guess which ASX 200 stock is sinking to a new 52-week low today following an update

This stock is having a poor finish to the week. But why are investors hitting the sell button?

Read more »

A woman sits with her hands covering her eyes while lifting her spectacles sitting at a computer on a desk in an office setting.
52-Week Lows

Market slump drags 26 ASX 200 shares to multi-year lows

Heavyweight ASX 200 companies like CSL and Wisetech are among them.

Read more »

a man holds his arms out and shrugs his shoulders as if indicating he doesn't know the answer to a question he's been asked.
Materials Shares

Why is this ASX 200 mining stock crashing 28% today?

Investors are rushing to the exits in large number. But why?

Read more »

Piggy bank sinking in water symbolising a record low share price.
52-Week Lows

16 ASX 200 shares that hit multi-year lows on Friday

Markets are nervous as US President Donald Trump winds back tariffs on some Canadian and Mexican imports.

Read more »

Investor looking at falling ASX share price on computer screen
Earnings Results

2 ASX All Ords shares crashing 16%+ on earnings updates

It's a red day for the market on Friday.

Read more »

Woman disappointed at share price performance with her hands on her face.
52-Week Lows

The Sayona Mining share price just hit a 4-year low

Things have gone form bad to worse for this lithium stock.

Read more »

Three people skydiving.
52-Week Lows

These ASX tech stocks just hit multi-year lows! Are they cheap?

A cheap share isn't always a bargain...

Read more »

Dollar sign in yellow with a red falling arrow in front of a graph, symbolising a falling share price.
Materials Shares

Ouch: The Pilbara Minerals share price just hit a multi-year low

It's been a tough day for lithium investors.

Read more »