Zip shares are continuing their tumble today but they’re not the only BNPL stocks on the nose.
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The Zip Co Ltd (ASX: ZIP) share price has tanked to fresh six-year lows today. But some company insiders may not be surprised by its dramatic fall from grace.
Zipâs CEO and co-founder Larry Diamond was warned eight months ago that there was trouble ahead for the buy now, pay later (BNPL) sector, according to reporting in the Australian Financial Review.
The warning was issued during a meeting at Morgan Stanley. The investment bank believed the BNPL sector was about to be hit by rising interest rates and surging inflation.
Zipâs share price fall wonât surprise some
The prediction looks prescient in todayâs environment. Zip shares tumbled 21.42% this morning to 49.5 cents. That’s the lowest the share price has been since 2016.
Diamond reportedly called Zipâs other co-founder in Sydney, Peter Gray, and told him the grim news. He said, “there are some clouds gathering on the horizon”. He also said they needed to shift their thinking from global expansion to self-preservation.
BNPL shares facing multiple challenges
Once a darling ASX share, Zip and its peers are now facing multiple challenges. Central banks around the world, including the Reserve Bank of Australia, are rapidly lifting interest rates and tightening liquidity.
This global trend created four big headaches for ASX BNPL shares in one fell swoop. Rising interest rates mean higher costs of funding for all companies. But it hits BNPL players harder due to their need to fund their interest-free payment offering in a business than generates slim margins.
The second issue is bad debt. As rates rise and the economy inevitably slows, more consumers are at risk of defaulting on payments.
Squeezed from all sides
Meanwhile, even BNPL users in a healthier financial position will likely be tempted to cut back on spending. We are already seeing consumer sentiment take a hit from higher rates and cost of living pressures.
Finally, higher rates are bad news for ASX growth shares. They tend to suffer most as the risk-free rate rises. As we have seen, this derating is most pronounced among ASX tech shares and BNPL shares.
Zip shares aren’t the only ones on the nose
It isnât only the Zip share price thatâs crashed. The Block Inc CDI (ASX: SQ2) share price, Splitit Ltd (ASX: SPT) share price, and Openpay Group Ltd (ASX: OPY) share price have also been pummelled.
The bad news doesnât end at higher interest rates, either. Growing competition from much larger and better-resourced companies is threatening to overtake these industry pioneers.
Last man standing?
The BNPL industry is likely to endure more volatility.
At the time, Zip shares were trading above $3. Today, Zip shares are down 88% year to date.
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Motley Fool contributor Brendon Lau has positions in Block, Inc. and National Australia Bank Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Block, Inc., and ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.