If a stock has a high level of short interest, it can pay to approach the security with caution. Short sellers tend to do their research. If they’re shorting a stock, there’s usually a good reason they are doing so.
In this report, we are going to look at the short interest at Zip Co Ltd (Z1P:AU). Previously known as ZipMoney Limited, Zip is an Australian FinTech company that operates a ‘buy now pay later’ (BNPL) service. The company was founded in 2013 and is listed on the Australian Stock Exchange. Currently, it has a market capitalization of AUD $4.05 billion.
Z1P Co: Short Selling Data
An analysis of the short selling data on Zip reveals that in recent months, short interest has increased dramatically.
At the start of April 2021, 21,301,964 shares or 3.85% of the total shares outstanding were sold short, with the value of the shares on loan equal to AUD $164.45 million.
However, according to an ASIC release on 3 August (settlement date of 28 July), there are now 66,530,426 shares on loan representing 11.84% of the total outstanding shares. At the 2 August closing price of AUD $7.24, the value of shares on loan was AUD $481.61 million.
After this increase in short interest, the stock is now the most shorted stock on the Australian Stock Exchange.
Why Are Short Sellers Targeting Zip?
Recent news from Zip has generally been very encouraging.
In the company’s Q4 results for the three months ended 30 June, for example, it reported record group quarterly revenue of $129.9 million, up 104% year on year. It also reported record quarterly transaction volume of $1.8 billion.
Meanwhile, during Q4, the company signed partnerships with a number of other FinTech firms including Stripe and Ayden. The Stripe partnership will enable Stripe merchants to access Zip’s Alternative Payment Method (APM) solutions. Meanwhile, the Adyen partnership will see Zip built into the Adyen global platform.
So, Why Are Short Sellers Targeting the Stock?
Well, it could be related to the fact that Apple and Goldman Sachs are moving into the BNPL space. In July, Bloomberg reported that Apple is developing a service that will enable users to pay for goods in installments. The tech giant is set to use Goldman Sachs as a lender for the loans. Going head-to-head with Apple will be a huge test for the Australian FinTech firm.
Another issue could be the valuation. At present, Zip stock trades on a trailing price-to-sales ratio of about 11 which is relatively high given that the company is still unprofitable.
Whatever the reason, short sellers clearly see downside risk. Given the high level of short interest here, we think caution is warranted towards the stock right now.