Affirm Stock: Buy now pay later disrupts the $3.6t credit card industry – The Average Joe

    Affirm Stock: Buy now pay later disrupts the $3.6t credit card industry

    Victor Lei — Head of Research

    June 30, 2021

    affirm stock

    June 30, 2021

    Affirm stock: Over the years, credit card companies fattened their pockets with profits from high “19.99%” interest rates. These rates have steadily risen for 13 years but one industry — buy now pay later — is out to disrupt consumer borrowing.

    US-based Affirm is the third-largest buy now pay later company globally — behind Australian Afterpay (ASX:APT) and Sweden-based Klarna (privately traded). Each of these companies is going after a massive market — disrupting the $3.6t credit card market.

    Explain to me: How does buy now pay later work?

    Catch me up: BNPL differs from the credit card industry in many ways. BNPL is primarily offered through e-commerce purchases (although that’s slowly changing), there are no interest rates on payments and the loan is paid back in installments (typically 4).

    • Affirm was founded in 2012 by Max Levchin, who co-founded PayPal.
    • The company went public in Jan 2020, soaring over 180% in its first month before falling 65% in the following 3 months.
    • In 2020 Affirm partnered with Shopify to offer its BNPL services to merchants on its platform.
    • In Feb 2021, Affirm announced a debit card that gives buyers direct options for BNPL.
    • In the first quarter of 2021, Affirm grew sales by 98% —

    How does Affirm make money? Through transaction fees. Whenever someone buys something using Affirm — the company takes a cut of the transaction. Affirm benefits from more merchants offering its payment method and more customers buying using Affirm.

    Affirm stock opportunity

    Why now? During its IPO in 2021, Affirm stock debuted in the public market at the peak of a bubble among growth and speculative stocks. Its stock quickly soared and crashed in just 3 months and is still down over 50% from its peak.

    Affirm was once an expensive stock with high growth potential. After its crash, Affirm stock has become a much more attractive opportunity.

    • With an expected ~$830m sales in 2021, Affirm trades at a 21x price-to-sales multiple — which we see as reasonably priced considering its growth, the industry it operates in and what competitors are valued at (Afterpay trades at >40x).

    What’s the upside? Affirm stock has several growth opportunities ahead:

    • Industry growth: Continued growth and adoption of BNPL payments.
    • Partnership growth: Growth from Affirm’s partnership with Shopify.
    • Product growth: New products offered by Affirm — In Feb. 2021, Affirm announced plans to launch a debit card that will offer BNPL on payments even in physical retail stores.

    We see Affirm’s partnership with Shopify as one of its largest near-term growth drivers. As part of their partnership, Affirm became the exclusive BNPL option offered through Shopify. More than $120b in transactions went through Shopify’s platform in 2020 and If Affirm can take even a fraction of Shopify’s $120b transactions, growth would be significant.

    Long-term, Afterpay’s debit card gives it large growth opportunities to expand beyond e-commerce and into in-person retail shopping.

    BNPL companies are also building a habit with consumers. 67% of Affirm’s purchases made in 2020 were completed by repeat users — while Afterpay has a repeat use of 90%. Affirm has a long way to go before reaching 90% but the numbers show one thing: buy now pay later payments are here to stay.

    What are the risks with Affirm stock?

    One of the biggest risks to Affirm’s stock is not with its business model, but with general market conditions. Growth stocks could be impacted by higher inflation on the horizon and interest rate increases expected for 2022/2023. Other risks include:

    • Customer concentration: 20% of Affirm’s sales come from one customer — Peloton (NASDAQ:PTON) — which is down from 28% from a year ago.
    • Product risk: Affirm makes nearly all its sales from its BNPL. While it’s launching additional products, these products may not catch momentum.
    • Unprofitability: Affirm is still losing a large amount of money — expecting an operating loss of $55m in the fourth quarter of 2021.
    • Incoming competition: International competitors like Klarna and Afterpay (ASX:APT) are all going after the US market.
    • Regulations: The credit card industry is heavily regulated but the BNPL industry is still new. In the UK, regulators have already cracked down on BNPL companies — which could be required to check whether consumers can afford items before buying.

    Regulations are a natural part of disruption but they could slow the growth of BNPL companies depending on their severity.

    Credit card companies like Mastercard and Visa are also exploring launching their own BNPL options — which could impact Affirm’s growth. As more competitors enter the market, Affirm could be forced to lower the transaction fee it takes from merchants — lowering its profitability.

    Investors: Affirm isn’t the biggest in the industry but it doesn’t have to be. The market is big enough for multiple winners and Affirm stock is positioned to benefit as the BNPL industry continues to grow.

    • Lack of profitability isn’t an issue here as Affirm reinvests back into its growth. It’s also not losing as much money as other high-growth tech companies.
    • How big of a threat is the competition? With the BNPL market making up only 1.6% of US e-commerce purchases and an even smaller fraction of total retail transactions, BNPL companies have room to grow together.Set featured image

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