Down 20% in a month: Is the Zip (ASX:Z1P) share price too cheap to ignore?

Zip’s shares have been sold off this month. Is this a buying opportunity?

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It has been a terrible month for the Zip Co Ltd (ASX: Z1P) share price.

Since the start of November, the buy now pay later (BNPL) provider’s shares have lost 20% of their value.

This means the Zip share price is now down 7.5% in 2021.

Why are its shares sinking this month?

Investors have been selling down the Zip share price this month despite the release of a positive update at its annual general meeting.

At the event, Zip’s Managing Director and CEO, Larry Diamond, revealed that Zip’s strong growth continued during October.

He commented: “October was Zip’s highest TTV month on record processing over $770m in transaction volume for the month, which was a 94% increase on October 2020, with the Company now annualising at over $9b. Off the back of the rebrand, October delivered a 24% MoM increase which provides outstanding momentum entering the seasonal peak period.”

However, this good news may have been offset by reports in the United States which suggest that fraud is rising in the BNPL industry.

An investigation apparently shows that criminals are exploiting weaknesses in the application process for BNPL loans and stealing items. Investors may be worried what impact this will have on margins.

Is the Zip share price now too cheap to ignore?

One leading broker that appears to see the recent weakness in the Zip share price as a buying opportunity is Morgans.

A recent note reveals that its analysts have put an add rating and $8.56 price target on the company’s shares. Based on the current Zip share price of $5.17, this implies potential upside of almost 66% for investors over the next 12 months.

Morgans is positive on Zip due largely to the company’s bold long term global ambitions and its current valuation. Its analysts highlight that in comparison to Afterpay Ltd (ASX: APT),  Zip’s shares are trading on significantly lower multiples.

The broker commented: “We continue to see longer term upside if Z1P can execute on its ambitions of becoming a global payments player. Noting the stock continues to trade at a significant discount to peer APT (~6x sales versus ~25x), we maintain our ADD recommendation.”

Should you invest $1,000 in Zip right now?

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