It was a big week for the Zip Co Ltd (ASX: ZIP) share price this week. The buy now, pay later (BNPL) share returned to trading on Friday after conducting a major capital-raising program.
What happened?
As we covered at the time, this saw Zip announce the completion of its share placement program. The company managed to raise $24.7 million through the issuance of 52.5 million new shares. These were issued at a share price of 47 cents each.
When a company comes back from a capital raising involving the issuance of new shares, its share price often falls to account for the increase in supply. However, that wasn’t the case with Zip on Friday.
Zip shares rocketed a whopping near-7% higher soon after open on Friday, going from 50.5 cents to 54 cents in under an hour. But investors dramatically cooled their jets later on, with Zip ending up closing flat at 50.5 cents a share:
Zip revealed that it intends to use the $24.7 million it has just raised to clean up its balance sheet. Here’s how Zip chief operating officer and co-founder Peter Gray explained it:
The placement will be used to fund the retirement of $39.8 million of our convertible notes at a very significant discount to face value. Along with the Consent Solicitation process, this exercise will reduce our corporate debt by $192.2 million, further strengthening the balance sheet and positioning the company for our next phase of growth.
So all of this begs the question: is Zip now a buy following this balance sheet cleanup?
Are Zip shares a post-capital raise buy now?
Well, I won’t be buying Zip. It has proven itself to be a resilient company, and has done a good job carving out a position in the buy now, pay later space. However, I still don’t see it as a compelling investment on a risk-and-reward basis.
For one, Zip faces some of the fiercest competition a company can. The payments space is especially crowded. The kinds of companies Zip has to go up against arguably include everything from Apple, Alphabet and PayPal to Visa, MasterCard and American Express. Even Zip’s old rival Afterpay is now backed by new masters at Block Inc (ASX: SQ2). That is a rather unenviable position to be in.
Furthermore, Zip’s latest quarterly update certainly didn’t come up smelling like roses. Over the third quarter of FY2023, the company revealed that its active customers were down 1% year on year.
Other metrics, like revenue, showed some promising growth. But, over the first half of FY2023, Zip still lost $43.4 million on an earnings before tax, depreciation and amortisation (EBTDA) basis.
That tells me that this company remains a risky investment, and given the extent of Zip’s ongoing competition, it’s not an investment I’ll be making.
The Zip share price is down 10.7% in 2023 so far at the time of writing
