Why is the Zip share price tumbling 6% on Tuesday?

Why are investors selling Zip shares?

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Key points
  • The Zip share price is hurting, it’s down 6% 
  • Fellow BNPL peer Sezzle just reported and it’s also down heavily  
  • Brokers are pessimistic about Zip at the current level 

The Zip Co Ltd (ASX: ZIP) share price is having a rough time today. It's down around 6% in what's proving to be a difficult day for some businesses in the buy now, pay later (BNPL) sector.

This comes on a day when, at the time of writing, the S&P/ASX 200 Index (ASX: XJO) is up 0.6%.

One of the main things that Zip investors may be focusing on is that the Sezzle Inc (ASX: SZL) share price is currently down by around 10%.

For investors that haven't seen, Sezzle has reported its FY22 half-year result to investors.

While Sezzle and Zip are different businesses, they operate in the same industry and investors may be able to make comparisons and assumptions.

Upset woman with her hand on her forehead, holding a credit card.

Image source: Getty Images

What did Sezzle report?

There were a number of different things that Sezzle said.

It said that underlying merchant sales (UMS) grew by 10.6% to US$869.6 million, active merchants increased 18.1% to 47,642, active consumers increased 18.2% to 3.4 million, repeat usage improved 193 basis points to 93.50% and total income rose 6.5% to US$56.9 million.

In the second quarter of 2022, the business ceased payment processing activities in India. It's also exploring the potential sale of its European and Brazilian operations.

The company pointed out that its operations depend on consumers transacting with merchants, which in turn can be affected by changes in general economic conditions.

It noted that the retail sector could be affected by factors like unemployment, interest rates, consumer confidence, economic recessions, downturns or extended period of uncertainty or volatility

Sezzle also pointed out:

In weaker economic environments, consumers may have less disposable income to spend and so may be less likely to purchase products by utilising our services and bad debts may increase as a result of consumers' failure to repay the loans originated on the Sezzle platform. Our industry is also impacted by numerous consumer finance and protection regulations, both domestic and international, and the prospects of new regulations, and the cost to comply with such regulations, have an ongoing impact on our results of operations and financial performance.

A lot of that commentary could certainly be applicable to Zip too.

Expert thoughts

Despite reporting ongoing growth in the FY22 fourth quarter, experts are negative on the Zip share price. In that quarterly update, Zip said its quarterly revenue rose 27% year over year to $160.1 million, customers rose 64% to 12 million and merchants increased 77% to 90,700. 

The Zip cash transaction margin was 2.4%. It also said that its losses in the US and Zip were improving.

Citi rates Zip as a sell, with a price target of $0.70. It's expecting less growth from the business.

The broker UBS also rates Zip as a sell as well with a price target of just $0.45. That implies a possible drop of 60%. 

Zip share price snapshot

Despite today's decline, the Zip share price is up around 80% over the past month. 

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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