The gap between the Zip Co Ltd (ASX:Z1P) share price and Afterpay Ltd (ASX: APT) share price could be set to widen.
This is because Citigroup downgraded Zip to "neutral" from "buy" as it cut its customer growth forecast.
The news is likely to weigh on the Zip share price, which is already lagging its bigger rival Afterpay.
Zip share price in the shadow of Afterpay
While the prospects of rising global interest rates have cast a cloud over the fast-growing sector, the Afterpay share price is still up by around 24% over the past year. In contrast, the Zip share price has slumped 14% in the red over the period.
Higher interest rates lower the valuation of ASX shares, particularly those trading at a big premium to the S&P/ASX 200 Index (Index:^AXJO).
That issue aside, Zip will find it harder to come out of the shadow cast by Afterpay after Citi's recommendation cut.
Lower new customer growth
Citi analysed various Buy-Now Pay-Later (BNPL) players' websites and mobile apps across key markets. The findings aren't so good for Zip even though Citi expects increasing app usage to drive strong transaction volume growth in the US for the company.
"Zip's app downloads were down for the sixth consecutive month in September," said the broker.
"We have lowered US customer growth assumptions and forecast 4.957 million customers in the US in 1Q21, which assumes customer net adds of 520k in 1Q22e."
This equates to a drop in customer net adds of 14% when compared to 4QFY21 when Zip recorded a figure of 608,000.
Other drags on the Zip share price
But this isn't the only reason why Citi downgraded the Zip share price. It also increased its operating expenses forecasts for the company. This is to reflect increasing promotional activity, such as cashbacks, and geographical expansion.
Then there is the risk of a capital raise to the Zip share price. This should come as less of a surprise given the acquisitive fervour shown by management.
"With $462 million of cash available as of Jun'21, Z1P has ample balance sheet capacity to funds its growth, including the recent US$50 million investment in Indian BNPL operator ZestMoney," added Citi.
"However, we do see potential need for an equity raise, especially if Z1P accelerates its international expansion strategy."
The broker's 12-month price target on the Zip share price drops to $7.40 from $7.95 a share.
