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Are Zip Co shares still a buy?

It’s been a strange few months for shareholders of buy now, pay later (BNPL) fintech company Zip Co Limited (ASX:Z1P). After storming to a 52-week high of $5.86 in mid-October, the company’s share price has stalled in recent weeks, slipping back down to $3.51 as at the time of writing. However, even despite the current dip, Zip has still managed to make its longer-term shareholders very happy, with the stock up well over 200% so far this year.

But even the most loyal shareholders may be starting to get understandably frustrated by the current lull in the share price. So is this a signal to sell, or might it instead present an opportunity to snap up extra Zip shares on the cheap?

At least one key indicator may point to the latter approach. Earlier this month, the company announced the successful completion of a $60 million capital raise aimed at institutional, professional and sophisticated investors. The placement closed oversubscribed, with the company increasing the amount of funds raised from the initially intended $50 million to $60 million due to significant demand.

This degree of demand for the company’s shares sends a strong positive signal to the market – but the placement is also the reason behind the company’s recent lacklustre share price performance. The issue price for shares sold under the placement was set at just $3.70 – more than a full $2 less than Zip’s mid-October high – and so share price dilution has put a real dampener on growth.

And on top of that, the company subsequently announced a share purchase plan for retail investors at the same issue price – closing on 20 December – which is effectively putting a cap on how high the company’s share price can go. There is no incentive for new investors to buy above the issue price, because they know that existing shareholders can just undercut them through the private placement. And so what this means is that the company’s share price is actually being kept artificially low.

That’s frustrating for current shareholders wishing to sell, because it means the current share price may not be entirely reflective of the stock’s true intrinsic value. Those seeking liquidity may have to make do with selling at a significant discount. But the flipside is that it could present a great buying opportunity for new investors searching for a bargain.

And looking at Zip’s recent achievements makes a pretty compelling case for investing, especially at these prices. Despite being often overshadowed in the media by its flashier competitor Afterpay Ltd (ASX:APT), Zip has notched up some significant wins of its own this year. Not the least of which was the November announcement that it had beat out Afterpay to be the first BNPL option available on Amazon Australia.

The September quarter also saw Zip deliver record revenues of $31 million, up 15% on the prior quarter. Customer numbers increased to 1.4 million over the three months, with total transactions worth $402.1 million processed through the platform.

But just to keep things in perspective, that result still places it a fair way behind Afterpay. For the 4 months ended 31 October 2019, Afterpay claimed global underlying sales of $2.7 billion and an active customer base of 6.1 million users.

Foolish takeaway

Zip’s growth numbers are still impressive, and are obviously capturing the attention of institutional investors who think that the buy now, pay later sector can support more than just one major player.

And if you agree with them, now might be a good time to buy, while there is still a roof on the share price.

If you're not sold on Z1P, don't miss these top income payers instead.

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Rhys Brock owns shares of AFTERPAY T FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. 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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