It is another painful day for the Zip Co Ltd (ASX: Z1P) share price. It is down by another 7%, meaning it's close to the price last seen in the March 2020 ASX share market crash when it went under $1.30.
Long-term Zip shareholders may not want to read the following two sentences. Over the last six months, the Zip share price has fallen almost 80%. In the 2022 year to date, Zip shares are down 64%.
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What's happening to the Zip share price?
The buy now, pay later (BNPL) business has seen a significant sell-off as investors reassess the growth and profit potential of the company.
Rampant inflation in the US is causing the US Federal Reserve to reassess how much it needs to increase the interest rate in 2022.
The boss of the Federal Reserve, Jerome Powell, recently spoke of how the Fed could raise rates by more than 25 basis points next month:
The labor market is very strong, and inflation is much too high.
We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting, or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.
Zip is planning to buy BNPL competitor Sezzle Inc (ASX: SZL). Sezzle has seen its share price drop 78% over the past six months.
The broker UBS thinks that it is going to take even longer for Zip to reach cash flow breakeven and that the business will be less profitable than previously expected. UBS has a Zip share price target of just $1.
Warning of lower cash profitability
Zip told investors in its FY22 half-year result that its unit economics were suffering.
During the six months to December 2021, Zip said that the cash transaction margin declined to 2.1%, down from 3.7%. The lower margin was due to rising bad debt costs with the current credit headwinds as well as an increased weighting towards the rest of the world.
How is Zip tackling this? It is addressing its risk decisioning policies and collections and recoveries processes to manage the credit performance immediately. Management also said that it's well funded with available financing to support its global growth plans.
Zip share price snapshot
In the past year, the Zip share price has fallen 81%. According to the ASX, its market capitalisation has almost fallen below $1 billion.
