Could this be why the Zip (ASX:Z1P) share price is underperforming?

Could this be why the Zip Co Ltd (ASX: Z1P) share price is down 50% from its August highs and is struggling to maintain ground?

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The Zip Co Ltd (ASX: Z1P) share price has more than halved since its August record highs and struggled to hold its ground in recent days. At Thursday’s closing price of $5.15, the Zip share price is now lower than levels seen after the company announced its QuadPay acquisition back in June!

Between June and November, Zip has increased its monthly transaction volume from $189.3 million to $577.1 million and increased its customer base from 2.1 million to 5.3 million. With its metrics more than doubling in just six months, could this hold the key as to why the Zip share price has struggled in recent weeks? 

Cash burn threatens capital raising

Citigroup lowered its Zip share price target from $6.70 to $6.40 with a neutral rating on Thursday. The broker cites the risk of an equity raise to strengthen Zip’s balance sheet. And Citi believes this may occur sooner rather than later as cash burn continues and growth plans expand. 

Zip’s latest update regarding its funding facilities can be found in its FY21 first quarter update. The company has a number of funding warehouses in place to support its customer receivables portfolio. It had undrawn facilities of $463.6 million to fund its Australian consumer receivables.

For its United States business, Zip had secured a revolving line of credit up to US$200 million from Goldman Sachs and Oaktree Capital to fund growth. It also finalised a new $100 million debt facility from Victory Park Capital Advisors to fund growth in Zip Business for SME receivables.

In terms of cash and cash equivalents, the latest figures come from Zip’s FY20 results where it had $32.7 million. Zip is, however, still a cash burning and loss making business that had a net loss of $20 million in FY20. 

Weakness across the BNPL sector 

While Citi brings to our attention the potential capital raising risk in the near-term, Zip isn’t alone in its recent underperformance. Buy now, pay later (BNPL) shares across the board have slumped to 6-month lows with Afterpay Ltd (ASX: APT) being the only exception. 

In recent months, the sectors that had previously benefitted from lockdown such as information technology and consumer staples have struggled, while beaten down sectors such as energy, financials and real estate have bounced back strongly. This rotation effect adds further insult to injury for the Zip share price. 

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Returns as of 15th February 2021

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 ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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