Investors always viewed Zip Co (ASX: Z1P) as the little brother to Afterpay. However, the investor sentiment is beginning to change as Z1P is up an impressive 70% for the week. Almost every investor is jumping on the Z1P train. However, many investors standing at the station are wondering whether there is time to invest before the doors close. Especially when Australia’s entrance into a recession could de-rail the ZIP train.

 

Why is Z1P rising like a rocket?

Z1P’s acquisition announcement of QuadPay, an American BNPL company, catalysed this week’s growth. The acquisition will ultimately allow Zip to enter the US ring and go head to head with Afterpay. To understand why the bulls got behind Z1P, we must understand Quadpay.

QuadPay is the leading BNPL company that is disrupting the American credit industry.  Just like Afterpay, QuadPay allows their 1.5million users to split their debt into four repayments over six weeks. All four payments are interest-free. Ultimately attracting people who are tight with money, which is increasing as inflation and taxes kick in.  Quad Pay generates around $70 million in revenue a year. In turn, the eyes of ZIP investors lit up with dollar symbols.

Furthermore, Z1P’s announcement signifies more market share and thus more revenue potential. Meaning investors expect Z1P to post pleasing financials in the months ahead. Hence, buy orders went through the roof. We saw a similar market reaction when Afterpay began venturing oversees and beyond the saturated market of Australia.

 

Should Z1P investors worry about a fragile economy?

The short answer is yes, especially if you are investing in the short term. The bears were shorting the entire sector as they forecasted a recession would cause BNPL customers to default on their debt. For example, Afterpay plummeted down to $8. However, now look at the BNPL giant, just hit a new all-time high of $52.26 today. Economic reality is being ignored. However, now that Australia is entering a recession we could see the bears emerge with even more powerful claws.

The economy just entered a recession and is extremely fragile. However, the most important lesson YIG could teach investors is that buyers buy on what they believe to be real, even if it is not true. Let’s put that into context. Ever since March 23rd, buyers entered the market and believed a recovery was on. Whether a true recovery was on it did not matter. Because buyers bought APT, ZIP, and OPY on the belief that the economy would recover. Also, greed infiltrated the minds of investors, convincing them to invest – because the “price can only go upright”.

The bullish activity, whether false or not, created significant support for Zip and Afterpay. Now catalysts, like Zip’s acquisition of Quadpay, are simply adding fuel to the BNPL rocket. Overall, Zip is surging, even when negative news floods the market. Buyers believe Z1P will continue to climb (greed). If the belief remains, short term investors could pocket a nice return even within a recession. Still it is extremely risky (opinion not advice). However, with Australia entering a recession the belief that Z1P will continue to rise could evapourate tomorrow.

Is Z1P worth the investment?

Before I start, I am obliged to remind our viewers that this not advice, only general commentary from my extensive research into this area

Short answer: No if you are a short-term investor (opinion not advice) maybe if you are a long-term trader.

If I were investing, I would set aside some cash and wait. Early ZIP investors should look to sell and take their profits in fear of a recessionary crash. Meaning Z1P should experience bearish activity in the following weeks. If the week wipes off a significant amount of gains from the ASX and ZIP then you might want to consider waiting. Because we know how much carnage fear can cause. Exhibit A the COVID-19 crash in March.

Keep in mind that greed is on steroids for ZIP. Remember, “be greedy when others are fearful and be fearful when others are greedy” – Warren Buffett.

Also, Split it Payments (ASX: SPT), Open pay (ASX: OPY), and Sezzles (ASX: SZL) are all up following Z1P’s catalyst. None of the above companies reported any news. Thus, the gains in these respective companies are ridiculous. However, investors are wondering could we see Z1P or APT acquire rival Australian BNPL companies in the future? If so, then the respective ASX BNPL companies would skyrocket.

If you enjoy our article or are wanting to learn more, you can subscribe to us for free via email and get updated when we post new article. From all of us at YIG, thank you for the support.

The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Patrick Mcloughlin, Senior Manager of YIG.

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