Affirm Holdings (NASDAQ:AFRM) has been roundly rejected by the stock market lately. AFRM stock has plummeted from a 52-week high of nearly $177 per share to under $24 per share today. For people buying simply because the stock price is down drastically off its highs, Affirm must seem like a steal at current prices. However, the truth is significantly more complicated than that.
Affirm achieved a high valuation in 2021 primarily on the narrative that it was a high-tech disruptive firm. Its “buy now, pay later” (BNPL) service was supposed to remake the lending and credit landscape. However, investors are increasingly coming to the conclusion that BNPL is just another form of high-cost consumer lending, and a particularly risky one at that.
A recent SFGate report noted that a shocking 91% of all new consumer loans issued in California in 2020 were for BNPL loans, which are also sometimes called “point-of-sale” loans. Generally, these BNPL offerings work by allowing people to pay over a number of payments, such as four, rather than paying for all of a purchase at once.
Some BNPL providers have marketed this as providing more flexibility or planning options for shoppers. However, critics say BNPL is simply allowing younger consumers, such as Generation Z folks, to take on way more debt than they can afford to repay.
A report from BNPL service Afterpay — now owned by Block (NYSE:SQ) — said that 73% of its Gen Z spend is on fashion items. This means that young impressionable shoppers are using BNPL services to essentially put clothes and accessories on layaway. This is risky behavior, both for the lenders such as Afterpay and Affirm, and also for the young consumers.
The idea of payments may make items seem cheap or even free, but the bill has to be repaid eventually. Whether Affirm and other such BNPL players will be repaid in a timely manner remains to be seen, especially as economic conditions are now rapidly changing.
On the cost side of the equation, there are concerns as well. A recent report found that BNPL players are seeing their losses mount as they compete for market share. Affirm, for example, saw its operating loss surge from $120.5 million in 2019 to $430.9 million in 2021. And that came even during a healthy economic period where consumers were flush with cash. Affirm’s losses could go from bad to worse if and when consumers start being unable to repay their loans on time.
All in all, this is a highly risky and unproven business model. Lending to younger, less well off consumers so that they can buy clothes and Peloton (NASDAQ:PTON) bikes on installment is a speculative venture even in the best of times. And now with inflation soaring and the economy seemingly turning downward, Affirm could see its financial losses mount. AFRM stock is one that should be handled with great caution going into its earnings reports in 2022.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.