Affirm Valuation: Price Forecast 2x In 12 Months?

Affirm (AFRM) reported better-than-expected fiscal fourth-quarter results. Seeing a 71 percent increase in total revenue growth and expanding their network of consumers and merchants by 40 percent year over year, Affirm stock rose by 20 percent following the report. 

The growth of Affirm has been exponential — and this growth is not anticipated to slow down any time soon. Although the company may need to pivot its long-term business strategy, there is plenty of opportunity ahead. This could result in significant growth over the next 6 -> 12 months. Here’s why. 

Affirm Is Disrupting Credit Cards

Affirm is a transparent and flexible alternative to credit cards. 

First founded in 2012 by Max Levchin, Co-Founder of PayPal, Affirm went public in January 2020 and has been growing ever since. 

The goal of Affirm is to allow consumers to “pay at your own pace.” When buying an item, consumers always know exactly what they will owe when their payments will end. There are no hidden fees or late fees involved.

From apparel to auto, beauty and health to electronics and everything in between, Affirm makes it possible for people to buy the things they want or need now, agreeing to more attractive (and less confusing) terms than credit card companies.  

For example, say someone is buying a vacation package on Expedia, at checkout, they have the option to choose Affirm as their payment option. This means that a flight or hotel can be booked now and paid for later.

Depending on the terms, you may pay zero interest. If your total is $1,000, you could potentially choose to pay three equal installments of $333.33/month. With this option, you wouldn’t pay any interest.

However, if you want to pay over 6 or 12 months, you could opt for an annual percentage rate (APR) of 15 percent. You would see exactly what your interest would be and your ending total. No surprises. 

Affirm makes money through commission fees from businesses and some consumers when charging interest on certain items. In most cases, even when interest is charged, the total will be less than what a credit card company would charge — and that information is readily available. You know what your terms are, instead of just blindly paying interest to credit card companies each month. 

How Affirm Became A Data Monster

Affirm began trading on the Nasdaq Stock market on January 13, 2021 and has gained significant momentum over the past year, but Affirm’s success did not happen overnight. This buy-now-pay-later (BNPL) company has an impressive history. 

From 2012 to 2014, Affirm’s strategy was to enter the U.S. point-of-sale market. Its first and only partner was 1-800-Flowers.com, which Affirm used to test its concept.

At the time, consumers were already concerned about the lack of transparency among credit card companies and were sick of high interest rates, hidden fees and penalties. Affirm saw an opportunity to offer an honest alternative that would catch the attention of consumers, one that was highly data-driven.

By mid-2014, the company had raised over $50 million in funding and had grown to form a team of 32 members. Of course, Levchin wasn’t your average CEO. Based on his history, Levchin created a unique algorithm and had strong relationships in the financial industry. 

The result? 

Affirm quickly attracted the attention of many new merchant partners — and the partnerships they acquired made a significant difference in terms of company capabilities and market share. For example, in 2015, Affirm partnered with LendLayer, allowing them to move into education loans, and in 2016, Sweep allowed Affirm to move into the personal finance space. 

By 2018, Levchin had collected an immense amount of data. He and his team gained critical insight into why, how and when consumers buy. This allowed Affirm to evolve into what it is today. Affirm leveraged the data and insights available to the company, making bold, informed decisions. 

Most recently, Affirm developed the Affirm savings account. Unlike many of its competitors, Affirm continues to develop and launch products that support its growing network.

This account is completely free, requiring no minimum deposit. With an annual percentage yield (APY) of 0.65 percent, it is one of the best rates around, and the money users earn is 13 times the national average. With the app, users can also see how much interest they have earned to date. 

What Makes Affirm Different?

Credit is confusing. Period. 

The complex terminology and cost structure of credit card companies makes it challenging for consumers to make fully informed decisions — especially when it comes to interest. In 2016 alone, American consumers paid more than $90 billion in fees.

With Affirm, consumers are quoted a fixed price up front. When they sign up for a loan, consumers know exactly what they’ll pay over the agreed upon period. This concept is a solution to the costs associated with credit cards. 

In many ways, Affirm offers payment options that mimic a credit card, but most often, without the interest. Offering flexible, convenient and flexible ways to pay, Affirm is a solution to a long-standing problem. 

For example, with Affirm, you see what an item will cost you at the end of your payment period. You will pay nothing more, nothing less after you agree to those terms.

In comparison, when paying with a credit card, you pay for the cost of an item, as well as compound interest and various fees. Not only are you in the dark about how much your end cost will be, but you can end up paying much more than anticipated. 

Affirm Financials Are Stellar

As stated by Max Levchin, Founder and Chief Executive Officer of Affirm, “Affirm’s strong results this quarter and fiscal year demonstrate the progress we are making in rapidly expanding our network… During the fourth quarter, we increased the number of merchants on our platform by more than fivefold, more than doubled gross merchandise volume and grew active consumers by 97 percent year over year.”

The following comparisons are made versus the same period in the fiscal year 2020.

• Total revenue was $870.5 million, a 71 percent increase. 
• Gross merchandise volume (GMV) was $8.3 billion for the 2021 fiscal year, an increase of 79 percent, or 91 percent when excluding Peloton. 
• For the fourth quarter of fiscal 2021, active merchants grew to nearly 29,000 — an increase of 412 percent. In addition, active consumers increased to 7.1 million, representing a growth of 97 percent. 

Recent business highlights include the following:

• In June 2021, Affirm partnered with Shopify, offering consumers the option to pay via Shop Pay installments. 
• In August 2021, Affirm secured $500 million for its point-of-sale installment loans. 
• In August 2021, Affirm also announced its partnership with Amazon, which would offer consumers flexible payment options. 

This report also included Affirm’s financial outlook for the first quarter and fiscal year 2022. These estimates do not include any potential revenue or GMV contributions for the rollout of Affirm Debit+, which is a strategy that is anticipated to support sustained growth. 

	Q1 2022	FY 2022
GMV	$2.42 to $2.52 billion	$12.45 to $12.75 billion
Revenue	$240 to $250 million	$1,160 to $1,190 million
Transaction costs	$145 to $150 million	$605 to $620 million
Revenue less transaction costs	$95 to $100 million	$555 to $570 million
Adjusted operating loss	$(68) to $(63) million	$(145) to $(135) million
Weighted average shares outstanding	275 million	290 million

The Buy Now, Pay Later Trend Is Booming

Companies like Affirm, Afterpay and Klarna have generated significant amounts of press over the past year. 

The numbers above show the growth of Affirm, which resulted from their approach to the concept of buy now, pay later. As consumers looked for ways to easily purchase the things they want without incurring more credit card debt, companies like Affirm were there to provide a winning alternative. 

Data shows that the percentage of Gen Zers in the United States using BNPL has grown from six percent in 2019 to 36 percent in 2021 — and the use of BNPL among Millennials has more than doubled since 2019. The number of Gen Xers using BNPL services has more than tripled, and even Baby Boomer adoption has significantly increased from one percent in 2019 to 18 percent in 2021.

This resulted in nearly $100 billion in retail purchases being made using BNPL programs in 2021, compared to $20 billion in 2019 and $24 billion in 2020. 

People were fed up with putting large purchases on a credit card, only to accumulate more debt. The majority of people do not have the cash flow needed to make such purchases. The BNPL was a simple solution to this issue, which is why growth has been so quick. 

A Bank of America survey found that of 1,124 BNPL users, 47 percent had used this payment option eight or more times in the last 12 months. In addition, 54 percent of those surveyed plan to use BNPL eight or more times in the next 12 months. 

Although this trend exploded rapidly because of COVID-19 and the rise in digital shopping, it isn’t going anywhere — it’s here to stay. 

According to a report by Allied Market Research, the BNPL market is projected to reach $3.98 trillion by 2030, experiencing a compounded annual growth rate of 45.7 percent. There are several reasons for this. One, consumers support the idea of affordable and convenient payment options, why wouldn’t they? Two, the growth of the eCommerce industry 

Affirm Has Impressive Partnerships 

Affirm has been solidifying one partnership after another, working with everyone from Walmart to Target, and from Shopify to Amazon. 

In 2020, Affirm wrote an article covering the benefits of implementing a pay-over-time solution, targeting any company interested in developing a more optimal growth strategy. From higher conversion rates to an increased average order value, higher new customer acquisition to an enhanced customer experience, the benefits are vast. 

Since then, the number of partnerships has skyrocketed. By November 2020, Affirm had 6,000 merchant partners, including Adidas, Peloton, Walmart and Dyson. 

Fast forward to 2021. This year gave way to even more partnerships — BIG partnerships. In a September 2021 report, it was revealed that Affirm had achieved 29,000 active merchant partnerships. This represented a growth of 412 percent. 

The most significant Affirm partner is Amazon, the nation’s largest retailer. Select customers currently have the option of splitting purchases of $50 or more into simple monthly payments using Affirm. Bringing affordability and predictability to millions of Amazon shoppers was a strategic and highly beneficial partnership that will continue to support the growth of Affirm. 

Affirm Is Disrupting Credit Cards 

As discussed above, Affirm has disrupted the credit card business and has not been shy about it. 

Affirm first started to gain momentum during the acceleration of digital shopping driven by the COVID-19 pandemic. This transition toward a boom in eCommerce allowed Affirm to achieve significant growth across user adoption, merchant partnerships and revenue. 

Over the years, credit card companies have made trillions of dollars by charging 29.99-percent interest rates. The BNPL industry is now significantly disrupting consumer borrowing.

Affirm is among the three largest global BNPL companies, competing with Sweden-based Klarna and Australian-based Afterpay. However, Affirm continues to gain momentum, slowly gaining market share. 

In September 2021, it was reported that Affirm exceeded its own expectations. Its roster of active consumers nearly doubled over the past year, yielding 7.1 million customers — and the company has some big plans moving forward. 

How BNPL differs from the credit card industry is as follows:

• BNPL is mainly offered through online purchases. However, this is slowly changing. 
• In most cases, there isn’t any interest. Buyers agree to a total price and then pay that amount in installments, avoiding steep interest charges. If there is interest on a loan, Affirm does not charge compounding interest— which is essentially interest on interest.
• “Loans” are paid back in installments, most commonly four. 

In February 2021, Affirm came out with its debit card, the Affirm card, which Levchin describes as “sort of an anti-credit card.” Although it serves the same purpose as a credit card, in that you can buy now and pay later, or pay your total over a period of time, this card is said to provide consumers with greater clarity. 

Unlike credit cards, which lack transparency concerning interest charges and late fees, Affirm’s debit card is the exact opposite. Consumers know exactly what they will pay and when, without needing to worry about any late fees. 

With the Affirm Card, consumers can decide if they want to split everyday purchases into budget-friendly payments. For example, say you made a purchase that was over $100 and didn’t want to make this chunk of money upfront, you would have the option to split that payment up into more manageable chunks. This card can be used online and in stores and payments can be managed in the dedicated app. 

Main Growth Areas and Drivers 

• Affirm’s partnerships have played a major role in the company’s growth and ongoing success. Amazon is a key partner that could unlock significant opportunities for growth. With over 300 million active global customers, this partnership will dramatically improve Affirm’s network of shoppers. Partnering with Target has also led to a jump in Affirm share price. 
• Product development will also be a key driver in Affirm’s ongoing success. The Affirm Card is a prime example, as it is the first of its kind in the United States. This debit card allows for installment payments on any purchase at any merchant. This shift will allow Affirm to benefit from sustained growth and a very bright future. 
• Expansion through acquisitions, including the acquisition of Returnly and PayBright. These acquisitions will allow Affirm to scale and enter new markets. 

Affirm Is Loved By Both Merchants and Consumers 

Affirm is gaining so much traction because both consumers and merchants benefit from its business model. 

Why Consumers Love Affirm

The reasons why consumers would opt for Affirm are clear. When given the option to make a large purchase across four equal payments, without accruing any interest, the consumer jumps at the opportunity. 

Credit cards are the second-largest source of debt among Millennials and those with credit card debt are more stressed about overall debt. People are tired of being in credit card debt. The financial ramifications are obvious. However, debt is also making consumers sick. Research shows that consumer debt creates psychological distress and poor overall health. 

In a recent Insider article, a personal finance author wrote about his experience with Affirm, stating that the company allowed him to pay off his couch over six months with zero percent interest and he would do it again. The process was simple, and she opted for auto-pay. A few days before each monthly payment, Affirm sent her a text and an email reminding her that the funds would be withdrawn from her account. For her, the greatest perk was being able to leave her savings where it was, collecting 1.82 percent interest at the time. 

The bottom line, Affirm is ideal for consumers because it helps them save money while creating a more transparent, flexible buying experience. 

Why Merchants Love Affirm

Then there are the benefits to merchants and retailers. What many consumers aren’t aware of, is that credit card companies charge retailers “swipe fees” — which add up quickly. These fees are generally between one and three percent per purchase. Traditionally, the alternative to this was ACH transfers, which take longer to process. 

Affirm helps to address both of these challenges. This BNPL company doesn’t charge swipe fees and payment processing isn’t sluggish. 

As reported by Affirm, businesses can also enjoy:

• An average order value is 85 percent higher or more. By enabling bundles, upgrades and add-ons, businesses can benefit from higher value orders. This is because consumers have the option to pay for it across time and for less than they would with their credit card. 
• Giving consumers this option is huge. When they can pay for items based on Affirm’s terms, they’re more likely to come back time and time again. A 20-percent repeat purchase rate also supports a company’s marketing and advertising budget. After all, acquiring a new customer costs anywhere from 5-25x more than retaining an existing one. This directly influences a company’s bottom line. 
• Affirm’s network of shoppers continues to grow and those who partner with Affirm gain access to this network. This allows them to drive conversion rates at each stage of the customer journey. 

For those operating an eCommerce store, Affirm is easy to integrate into your site. This makes checkout a breeze for customers, which they appreciate. On the other hand, if you mainly (or only) operate in-store, you can easily display signage at checkout. You can also verbally communicate this option to your customers. 

The bottom line, Affirm helps to ensure less mobile cart abandonment while increasing awareness and boosting overall conversion rates. 

Affirm Is Developing the Concept of Its “Super App”

Affirm is showing that it’s more than a BNPL service. As Levchin said, “Our superpowers are in developing sophisticated, scalable technology, risk management and highly efficient access to capital… Expect us to look for more opportunities to buy and build, as we look to leverage our core strengths.” 

Being highly ambitious and technologically advanced, Affirm hopes to become the world’s next “super app” — much like Alipay, WeChat and Paytm. These companies all share one thing in common. They combine everything in one place, ranging from shopping to financial services. 

One space that Affirm is looking to move into is crypto. Customers will be able to buy and sell digital currencies directly from the Affirm app. Their goal is to allow people to do so simply and safely. They are currently working with New York Digital Investment Group LLC to make this happen. 

Furthermore, the company is developing a program that allows merchant partners to market-specific offers and discounts tailored to customers based on the items they purchase. Leveraging this data will support continued growth. 

This is just one more example of how Affirm is going above and beyond. They are not stuck on one concept. Instead, Affirm is a fluid and highly adaptable company, shifting with the latest trends and needs of its customers. 

Affirm Versus Klarna 

The concept of buy now, pay later is an attractive one to both consumers and merchants, so naturally, there are several players in this space. Klarna is one of them.

Affirm and Klarna are competing head-to-head in the short-term lending market, with each offering its own unique features and benefits. You may have come across these names before, wondering how do they differ?

Let’s start with Affirm…

• When making a purchase, you will either pay your first installment at the time of purchase or nothing at all.
• The repayment terms will depend on the loan type. However, most buyers benefit from flexible options, choosing the terms that best suit them. Although many purchases are split into four installments, terms up to 48 months may be available. 
• Interest is as low as zero percent. When interest is charged, it ranges from 10 to 30 percent. Consumers are shown what that interest will cost them over the pay period. 
• A credit check may be required depending on the loan type. Purchase amounts go up to $17,500. 
• There are no late fees. 
• Some of the most popular brands that have partnered with Affirm include Best Buy, Target, Peloton, Walmart and Amazon. 

The most significant cons include potentially high interest rates in select situations, potential credit checks and the fact that pre-qualifications do not mean that your transaction will be approved.

Now for Klarna:

• At the time of your purchase, you will need to pay 25 percent.
• The repayment terms typically require consumers to make a payment every two weeks, paying 25 percent at each payment due date.
• As long as these payments are made on time, no interest is charged. When interest is charged, it is up to 19.99 percent APR. 
• A soft credit check is required, which does not affect your credit score. However, this will show up on your credit report. If you wish to pay off your total over up to 36 months, then a hard credit check will be required. 
• There are late fees charged. If you miss a payment, that sum will be added to your next due date, plus a fee of $7 (up to $35). 
• Some of the most popular brands that have partnered with Klarna include Bed Bath and Beyond (BBBY), Sephora, Tommy Hilfiger and Nike (NKE). 

The cons that are worth considering here include the need for a soft credit check, late fees and the fact that missed payments may be reported to the credit bureau — which could negatively affect your credit. 

Affirm Versus Other Alternatives 

When discussing BNPL companies, Afterpay must be mentioned, which is fairly similar to Klarna. 

Let’s take a closer look at what you can expect with Afterpay:

• At the time of your purchase, you will need to pay 25 percent.
• The repayment terms typically require consumers to make a payment every two weeks, paying 25 percent at each payment due date. 
• There is zero percent interest. 
• No credit check is required. 
• There are late fees that begin at $10, plus an additional $7 if payment isn’t paid within seven days following the due date. 
• Popular brands that have partnered with Afterpay include UGG, Pandora, Forever 21, Old Navy and Bed Bath and Beyond. 

The biggest cons associated with Afterpay include the inclusion of late payment fees, a credit limit that is not clearly disclosed and the fact that there is only one repayment option. 

Another popular buy now, pay later company is Sezzle. Again, this company most commonly divides the total price of an item into four equal payments that are spaced two weeks apart.

Sezzle is smaller than Affirm, Afterpay and Klarna, but continues to gain value that’s tough to ignore. This company is seeing significant growth when it comes to reviews and social media and employee headcount. 

Affirm Remains a Standout Option in the BNPL Industry 

In 2021, Bank of America (BofA) analysts identified Affirm as a “standout” in the realm of BNPL services. 

The company is being referred to as a “clear bright spot.” While all the other BNPL vendors saw deceleration in September app downloads, as well as monthly active uses, Affirm saw growth in both metrics. 

There is no denying that the BNPL space is becoming crowded, but Affirm has an upper edge because of its partnerships, future product roadmap and its “super app” strategy. Affirm hasn’t stopped at affordable payments for consumers. The company’s business plan is so much more than that, which is what we’re seeing now. 

The bank anticipates that Affirm will deliver 30 percent top-line growth for at least the next several years. This growth will be driven by the growing BNPL market, as well as the new products that Affirm has in the works. 

Based on the partnerships and investors Affirm has already acquired, they have the support and network they need to make their ideas a success. 

As of October 22, 2021, there are discussions of Affirm being the growth star of the Fintech 50 Index. Daily Fintech made an interesting comparison, stating that although Klarna was the first BNPL innovator, it will not necessarily win the majority of market share — “think Facebook beating Myspace.”

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.