Motley Fool Australia

Zip (ASX:Z1P) share price slumps 10% this week: is it a buying opportunity? 

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Zip Co Ltd (ASX: Z1P) shares have had a rough week following the company’s announcement of its much anticipated Q1 FY21 trading update. With the Zip share price falling more than 10% this week (at the time of writing), could it be a bargain ASX 200 tech share buy? 

What caused the Zip share price to sell off? 

More broadly speaking, buy now, pay later (BNPL) shares bottomed in late September followed by a strong rally into mid October. BNPL shares such as Afterpay Ltd (ASX: APT), Openpay Group Ltd (ASX: OPY), Sezzle Inc (ASX: SZL), Splitit Ltd (ASX: SPT) and Laybuy Holdings Ltd (ASX: LBY) all rallied between 10% to 25% during this period. 

In the case of the Zip share price, it rallied some 30% from September through to its October peak. However, without the backing of any announcements or material news, this suggests that much of the anticipated announcement had already been priced in. Unless the Q1 FY21 trading update contained some extraordinary updates, I believe the market treated it as news to sell into. 

Q1 FY21 trading update 

At face value, the Q1 FY21 trading update was well rounded and highlighted Zip’s strong growth in the United States, maturity in Australia and New Zealand, and expansion of the company’s strategic partnerships and products. 

The US business is hitting its stride following the completed acquisition of US BNPL company, QuadPay. Its US revenue soared 409% on Q1 FY20 or 50% on Q4 FY20 to $23.4 million, representing a third of the company’s revenue. Momentum continues to grow for the QuadPay app with more than 7,000 customers joining on average each day and increasing web traffic, with unique visitors growing 42% QoQ. 

The only reason I can see why the Q1 FY21 update may have failed to live up to expectations was the fact that there was no ‘new’ business updates. The QuadPay acquisition and anticipated strong growth figures in the US have been known for months. The ANZ market is arguably reaching its maturity and growth figures will no longer be triple digits. Zip’s new partnerships and products such as its strategic partnership with Visa Inc (NYSE: V) and its SME loans via Pocketbook and the Australian arm of eBay Inc (NASDAQ: EBAY) are not yet significant revenue contributors.

Foolish takeaway

Notwithstanding the dip in the Zip share price, I believe the company delivered a strong Q1 FY21 business update. It is good to see the US business growing strongly despite the fears regarding PayPal Holdings Inc (NASDAQ: PYPL) entering the BNPL space. I believe more time is needed for the business to explore new market opportunities. Personally, I’ll be watching the Zip share price closely at its current level as it could represent a good entry point.

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Returns as of 6th October 2020

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings and Visa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends eBay and Sezzle Inc and recommends the following options: long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, and long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended PayPal Holdings and Sezzle Inc. 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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