Zip Co Ltd (ASX: ZIP) shares are enjoying a welcome day of modest reprieve today after a horror month.
Shares in the S&P/ASX 200 Index (ASX: XJO) buy now, pay later (BNPL) stock closed down 4.0% yesterday trading for $2.17. During the Friday lunch hour, shares are changing hands for $2.18 apiece, up 0.5%.
This leaves Zip shares down 33.5% since 7 January. A period that's seen the ASX 200 gain 2.9%.
So, after the big monthly sell-down, is it time to buy the dip on Zip, or does this knife have further to fall?
What's been pressuring Zip shares?
Before we look at whether Zip shares may now be trading in bargain territory, here's what has been dragging the stock lower.
If you were watching your screens on 30 January, when the payments company reported its December quarter results, you would have seen the stock plunge 25.4% on the day.
Despite strong growth metrics – including a 50.2% increase in cash earnings before taxes, depreciation and amortisation (EBTDA) to $35.3 million – investors were hitting their sell buttons, possibly put off by Zip's revenue margin slip from 8.2% in the prior December quarter to 7.9%.
This week, Zip shares faced fresh headwinds as the government released its draft proposal on new regulations for the BNPL industry. The Australian government looks set to finalise those over the coming months.
With BNPL stocks likely to face fee caps and be held to the same standards as credit card companies, investors again were favouring their sell buttons.
Now what?
Getting back to our headline question, with Zip shares down almost 34% in a month, should you look at buying the dip?
For some greater insight into that question, we defer to Adrian Ezquerro and Jonathan Wilson, portfolio managers at the Elvest Fund.
In Elvest's January monthly report, Wilson and Ezquerro noted that Zip was among the main drags on the fund's monthly performance.
Commenting on the big share price fall following Zip's quarterly update, they said:
The result was operationally sound with continued above-market topline growth in the US, headlined by Total Transaction Volume and Revenues up on last year by 39% and 42%, respectively.
As for why the sizeable growth in cash earnings didn't please investors, the fund managers said:
Cash EBTDA of $35 million was up 50% but missed lofty expectations due to increased marketing expenditure during the Christmas period, much of which is merchant-partner co-marketing tied to transaction volumes. US users, which had been relatively flat in 2022, rose by 280,000 or 7% to 4.2 million during the quarter.
While new customer groups initially have higher loss rates, the Pay-in-4 model has shown itself to be resilient even with fast growth, due to its short duration and real-time risk management.
Looking ahead, Wilson and Ezquerro sounded a positive note on the company's cost management.
"Management emphasised cost discipline for the remainder of the financial year, reiterating 6% to 10% cost growth in FY 2025," they said.
And the fund managers believe Zip shares have a lot of growth ahead.
"With BNPL's share of transactions sitting at around 2% in the US versus 15%+ here and in other countries, and ZIP consistently ranking well across iOS and Android, we continue to see a long growth runway," they said.
As for where the share price may go over the next 12 months, the consensus view of nine analysts on Trading View has a minimal estimate of $2.70 and a maximum estimate of $4.20, with an average share price target of $3.50.
Taking the average here, this would represent a 60% upside from current levels.
Zip shares remain up 159% since this time last year.
