Affirm Holdings (AFRM +5.07%) is a provider of buy now, pay later (BNPL) loans, an installment-based consumer finance product that has surged in popularity over the last few years, particularly among young consumers. The model is designed to disrupt the age-old credit card business by using technology to offer quick financing at the time of purchase, with short-term durations and clear payment terms.
But soaring inflation and rising interest rates have rocked the U.S. economy in 2022, and investors grew worried that Affirm's loan book would deteriorate. They were half right; delinquencies have ticked higher but currently remain below pre-pandemic levels, which should help to ease concerns.
Nonetheless, Affirm stock has declined 89% from its all-time high. But with inflation seemingly past its peak -- based on October's softer consumer price index data -- Affirm might have an opportunity to enter a new phase of growth. Here's why the stock could be a great buy while the Nasdaq 100 technology index remains in bear territory.
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Affirm's share of the e-commerce market continues to climb
Affirm remains one of the BNPL industry's largest players even after factoring in the company's steep decline in value. One of its largest global rivals, Afterpay, was taken out in a blockbuster $29 billion acquisition by fintech giant Block last year. These companies owe their success to their ability to occupy prime online real estate, which makes it quick and easy for consumers to tap into financing.
What do I mean? Affirm, for example, integrates with the e-commerce stores of its merchant partners and is presented to the customer as a payment option at the checkout. No need for a lengthy approval process, no complicated forms; in most cases, all it takes are a couple of clicks to pay for the goods in a shopping cart.
In the first quarter of fiscal 2023 (ended Sept. 30), Affirm financed $4.4 billion worth of purchases (gross merchandise value, or GMV), which is approaching 2% of all e-commerce sales in America. But that remains a fraction of the global opportunity, which Affirm estimates is $10 trillion each year.
But naturally, when consumers feel the financial pinch, they tend to prioritize their mortgage, car loan, and essential expenses. The $200 they borrowed using a BNPL service to purchase clothes, for example, perhaps falls down the order. Customers defaulting or falling behind on their payments has been a major concern for investors this year, and it's a primary reason Affirm stock has declined so much.
Affirm tracks loans that are delinquent for 30 or more days, and while these have ticked up in recent months, they're still below pre-pandemic levels, which is a positive sign. In fact, the loss rates for its shorter-term "Pay in 4" loans are significantly below all prior years on record.
Affirm's growth continues to soar through difficult times
If one thing is for certain, people love using Affirm. The company reported 14.7 million active customers in Q1, which was a 69% jump from the same period last year. Moreover, transactions per customer climbed by 39% to 3.3. In essence, more people are using Affirm to finance short-term purchases, and they're doing so more often than ever.
Active merchants in the Affirm network soared 140% to 245,000, thanks in part to the company's deal with e-commerce giant Shopify, which enables online store owners to integrate Affirm's BNPL solution into their checkouts.
Although Affirm's Q1 revenue also saw a robust 34% increase to $361.6 million, investors are more worried about the company's ability to turn a profit. It's taking steps in the right direction, and it estimates its adjusted operating income will be in positive territory by the end of the current fiscal year.
That means there needs to be enough revenue after transaction costs to cover its remaining operating costs. In Q1, the shortfall was just $18 million, so it's getting really close. The company's net loss -- otherwise known as its bottom-line loss -- remained elevated at $251 million, though it was down from $306 million in the same quarter last year. That will probably keep some investors on the sidelines, at least until broader stock market conditions improve.
NASDAQ: AFRM
Key Data Points
Why Affirm stock might be a buy now
Despite the company's net losses, its saving grace might be its strong balance sheet. It has over $2.7 billion in cash, equivalents, and securities available for sale, which offers plenty of runway for the company to continue working on achieving profitability, without sacrificing all of its potential growth.
With that in mind, the high end of Affirm's forecast for the fiscal 2023 full year points to $21.5 billion in gross merchandise volume, representing a 39% jump from fiscal 2022. That's a slowdown relative to its growth rates in past years, but balanced against its priority to improve its losses, it would still be a very strong increase.
Plus, the economy is weak right now and if that picture changes for the better, investors might see an upward revision to that guidance in the coming quarters. Though there is also a downside risk to that equation, especially because some of Affirm's partners like Peloton Interactive are fighting to stay afloat at the moment.
In any case, the risk versus reward equation might make sense here given how much Affirm stock is beaten down. Over the long term, investors could expect to see Affirm's efforts result in a more financially healthy business, while its partnerships with giants like Shopify and Amazon continue to supercharge its growth.
