- Affirm (AFRM) stock has bounced back sharply from its March low
- Affirm insists its growth story is intact
- The risks and rewards of normalizing Buy Now, Pay Later
Affirm Holdings (NASDAQ:AFRM) stock, the Buy Now, Pay Later (BNPL) company, has bounced off its lows.
Shares that traded near $30/each a month ago were due to open at about $47 on April 4. That’s a fat short-term gain, but there are people who bought in October near $146 sitting on big losses.
It’s still not cheap. At its current price Affirm is worth $13.2 billion on expected 2022 revenue of $1.32 billion. But that would be up 29% from fiscal 2021’s $870 million, and double 2020’s $509 million.
Affirm offers fixed-term loans, sometimes with no interest, as opposed to the revolving credit terms of credit cards from Visa (NYSE:V) and MasterCard (NYSE:MA). The stock rose last year while shares in the traditional credit processors fell.
Is that history about to repeat itself? Probably not.
The Bull Case
Affirm became a Wall Street star last year after it signed a deal to provide its service to Amazon.Com (NASDAQ:AMZN). A month after that it signed a similar deal with Walmart (NYSE:WMT). Affirm also has an arrangement with Shopify (NASDAQ:SHOP).
The action made founder Max Levchin, a young Ukrainian immigrant, a multi-billionaire. Forbes recently estimated his fortune at $1.3 billion. Despite the stock’s plunge Levchin insists he hasn’t sold a single share.
Affirm management is telling Wall Street it’s still seeing rapid growth in its number of users, its Gross Merchandise Volume (GMV), and in revenue. The 70% fall of the stock’s price in 2022 only began to reverse last month after the company raised its revenue guidance.
The Bear Case
The bear case for Affirm comes down to credit risk and growing competition.
BNPL companies are not transaction processors. They’re also lenders, packaging and re-selling their loans to the market. They were sold last year as tech stocks, which have high value, but as they scale operations they are seen as banks, which have low value.
Seen as a tech stock, Affirm is scaling losses as fast as it’s scaling revenue. The company lost $431 million during its 2021 fiscal year ending in June, on revenue of $870 million. The previous year it lost $113 million on revenue of $509 million.
If you look at it as a bank, however, you see current assets nearly tripling, year-over-year, and you see those loans as assets, not liabilities.
After first being blindsided by BNPL, the credit card industry has responded. Mastercard has added a host of new partners to its Mastercard Installments program. Visa has made its Visa Installments service an Application Program Interface (API), making it easy to support. This has brought the entire banking sector into direct competition with Affirm.
The Bottom Line
The high interest rates charged on credit cards, and Affirm’s early promise of interest-free loans, has given it big advantages in the market.
If it can scale operations to the size of its new partners, and maintain customer loyalty, it could justify investor confidence. If Block didn’t dramatically overpay for Afterpay, AFRM stock looks cheap.
But as money starts costing again, banks have an advantage. Their capital is still practically free, from depositors. Affirm must get cash from the market.
Barron’s called Affirm a buy a year ago, when the stock was 32% higher than it is now. BNPL was considered the future of shopping.
That may be true. But Affirm won’t get all that market. My guess is that it’s a good short-term buy, but long-term investors may be disappointed. BNPL isn’t a tech play. It’s a banking play. That limits the upside.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.