The Zip Co Ltd (ASX: Z1P) share price has tanked almost 30% in September following a parabolic run to almost $10. Looking ahead, will the negative news involving Paypal Holdings Inc (NASDAQ: PYPL) and banks entering the buy now, pay later (BNPL) space continue to weigh down the Zip share price? Or will a general recovery in the broader market and other factors make its September pullback a buying opportunity?
Paypal a threat but banks are not
The Australian Financial Review highlights the concerns that Paypal will create headwinds for BNPL players in the United States. It cites that the key concern is Paypal's cheaper price point for merchants and its product being a closer than expected copycat of Afterpay Ltd (ASX: APT).
The good news is that the new, interest-free credit cards issued by the likes of the Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) are "nothing new and unlikely to be felt by Afterpay in the Australian market given its dominance". The Commonwealth Bank's 'CommBank Neo' card will provide customers with up to $3,000 of credit with no interest payments, no late payments and no foreign currency fees but with a fixed monthly fee. From a cost perspective, it would still be cheaper to use BNPL platforms as opposed to these new, interest-free credit cards.
Klarna's ballooning valuation
Swedish BNPL player, Klarna, was valued at $11 billion ahead of a likely stock market listing. The company recently raised $650 million from US private equity firm Silver Lake, Singapore's sovereign wealth fund GIC, BlackRock and HMI Capital to accelerate its growth, expand globally and improve its product offering. Klarna estimates that it will generate US$1 billion revenue in FY20, valuing the company at approximately 11 times revenues. This compares to the likes of Afterpay at 15 times revenue and Zip at 7.5 times revenue.
Zip appears to be good value given Klarna's valuation and Afterpay trading at a much higher multiple. The company has also expressed its plans to launch in the United Kingdom market in 1H21 and explore further geographic opportunities. Furthermore, Zip also provides credit offerings for SMEs in Australia, which may prove to be another unique market and revenue opportunity.
What's next for the Zip share price?
Zip is in a comfortable capital position with the flexibility to explore many geographic and product-driven growth opportunities. I believe the main challenge for the Zip share price will be the way the general market moves. With the Nasdaq Composite (NASDAQ: .IXIC) struggling on Friday and weakness in the S&P/ASX 200 Index (ASX: XJO), it is likely that the Zip share price will continue to see weakness and volatility in the near term.
