Zip Co Ltd (ASX: ZIP) shares are falling on Monday morning.
At the time of writing, the buy now pay later provider's shares are down 2% to $1.66.
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What's going on with Zip shares?
Investors have been selling the company's shares this morning despite news that it will return to the benchmark ASX 200 index later this month.
After the market close on Friday, S&P Dow Jones Indices announced that it will remove Altium Limited (ASX: ALU) from the ASX 200 index when the electronic design software provider's acquisition by Renesas Electronics Corporation completes.
Taking Altium's place in the illustrious index next Monday on 22 July will be Zip.
This could be good news for Zip shares for a couple of reasons. One is that ASX 200 index funds will need to buy its shares to reflect the changes. This can add pressure to the buy side of the equation and propel its shares higher.
Another reason why it can be good news is that many fund managers have strict investment mandates. One common mandate is that they only invest in companies included in the ASX 200 index. This is to prevent the funds they manage from being invested in speculative stocks that could result in large losses.
So, if any of these fund managers have liked the look of Zip's impressive performances in 2024, they will now be allowed to buy its shares.
Should you invest?
There's no doubt that Zip's transition to profitable growth has been remarkable.
At one stage, many in the market believed the company would never be able to reach this milestone. But it certainly has proven the doubters wrong in FY 2024 and appears well-placed to build on this in FY 2025.
However, Zip shares are up approximately 300% since this time year because of this transformation. So, is it now too late to invest?
Unfortunately, as things stand, the broker community thinks that its shares have rallied beyond fair value now. For example, Citi currently has a buy rating and $1.40 price target on its shares, and UBS has a buy rating and $1.55 price target on them.
Based on the latest Zip share price, this implies potential downside of 15.5% and 6.5%, respectively.
Though, it is possible that these recommendations could be updated in August if Zip outperforms expectations with its full year results. But until then, investors may want to approach this one with caution.
