There is no dispute that it’s been a painful couple of years for Zip Co Ltd (ASX: ZIP) investors.
The stock price for the buy now, pay later (BNPL) outfit has plunged more than 95% since its February 2021 peak, or 91.7% since the market rotated out of growth shares in October 2021.
Yikes.
To be fair, all BNPL providers suffered from a bursting of the industry’s bubble.
But its big rival Afterpay never had its plummeting valuation on public display, as it was absorbed in 2021 by massive US giant Block Inc CDI (ASX: SQ2).
So Zip became a symbol of the market completely turning its back on a once-darling fintech concept.
But just recently, something odd happened.
One analyst from Shaw and Partners slapped a target for the Zip share price that implied a 240% upside from current levels.
‘It looks like it’s turned a corner’
Although he personally was not the analyst that set that extraordinary target, senior investment advisor Adam Dawes explained some of the reasons why Shaw and Partners is so bullish on Zip.
Firstly, he feels the market is harshly punishing the stock despite decent business performance.
“Third quarter transactions were 2.3 million, up 12% for the year. Transaction volume was $2.2 billion, up 9% for the year. And revenue was $182 million, up 15% for the year,” Dawes said on Switzer TV Investing.
“It looks like it’s turned a corner. We’re potentially starting to see some green shoots.”
Secondly, the federal government made a ruling last week that buy now, pay later services would be classified as credit by the end of this year.
This gives Zip an advantage, according to Dawes, as it was already one of the more stringent BNPL providers.
“We always knew Zip did a lot more to onboard a customer than its nearest competitors,” he said.
“Hence why Zip is actually looking a little bit better.”
Thirdly, perhaps in a similar vein to Afterpay, Zip is a takeover candidate.
“They’ve got over 80,000 merchants sitting on their database, customers are in the millions,” said Dawes.
“Any bank would love that kind of retail database.”
Can the buy now, pay later provider regain upward momentum?
Dawes did note though that Zip shares are still heavily shorted.
In fact, The Motley Fool reported this week that the fintech stock is among the top 10 most shorted on the ASX, with 8% of the register currently lent out for shorting.
“So if there’s a suitor out there, they probably could just sit back and wait [to see] if they can get this cheaper.”
But, of course, heavily shorted shares also rise at a rapid pace if sentiment turns around. That’s because all those short sellers will suddenly be in a hurry to buy the stock, pushing up demand.
The Zip share price is down 3.57% year to date, closing Wednesday at 54 cents.
With the latest quarterly update looking positive, Dawes feels like a couple of similar periods could give Zip shares some momentum.
“The share price can potentially get back over $1.”
