The Zip Co Ltd (ASX: Z1P) share price is in focus. What is the outlook for the buy now, pay later company?
It has been a tricky year for the BNPL business. Whilst the Zip share price only shows a 12% drop this calendar year, there has been a much bigger decline over shorter time periods. Over the last six months, it has dropped 32% and it's down 64% since 16 February 2021.
What is the outlook for Zip in 2022?
The business itself is confident about growth in the short-to-medium-term.
Just this month, Zip said that it remains steadfast in its mission to disrupt the "unfair and broken" credit card with a better and fairer digital alternative, with the goal of becoming the first payment choice everywhere and every day.
The Zip managing director and CEO Larry Diamond said:
We enter calendar year 2022 with strong momentum, in a solid financial position, with continued focus on execution, unit economics and global synergies.
It is now processing annualised volume of more than $10 billion. After a number of expansions and acquisitions, it now has one of the largest BNPL footprints geographically.
But one expert is not so bullish about the BNPL industry's prospects.
McLean Roche sounds the warning bell
Grant Halverson is the founder of the payments consultancy organisation McLean Roche.
Halverson believes that the buy now, pay later companies may see higher bad debts next year, which snowballs into lower credit ratings and higher funding costs.
The Australian Financial Review reported on why Halverson is negative on the industry:
The moment their bad debts go up their cost of funding will go up three or four times faster than the actual rate rises and the rating agencies will downgrade them, and then they'll get to junk status.
Because they're all frantically going at the US they're racing to the bottom. And that means probably more bad debts because they've gone after customers who haven't got credit ratings.
They're going to have to try to raise a lot of money. It partly depends on how quickly interest rates go up, because if they go up quickly there could be carnage. If there's a slower uptick then obviously the carnage will be slower in my view.
There is also concern for the buy now, pay later players that the sector may soon have to face the prospect of merchants being allowed to apply surcharges for the BNPL costs they pay on behalf of customers.
Zip continues to grow quickly
Whilst the Zip share price is falling, operationally it continues to deliver a high level of growth.
In November 2021, Zip achieved record monthly transaction volume of $906.5 million which was a 52% increase year on year.
Customer numbers increased by 71% year on year to 9.2 million. Zip business transaction volume grew 44% month on month to $15.2 million.
Its geographic expansion markets delivered $50 million more of volume than the AGM projections.
Zip is now in numerous markets including the USA, Australian, New Zealand, the UK, Canada, Mexico, Poland, Czech Republic, UAE, Saudi Arabia, and South Africa.
What do analysts think of the Zip share price?
Opinions are mixed about the business.
UBS is neutral (after thinking it was a sell for a while) on the company's prospects now that the Zip share price has fallen so much. It recognises the progress that Zip is making in the US. It has a price target of $5.20 on the BNPL business.
Morgans rates it as a buy, with a price target of $8.56. It thinks Zip can deliver good growth over time, even if growth is slowing down now.
