Fintech companies and digital entrepreneurs are disrupting the financial services industry in ways that traditional bankers never thought possible. Credit reports, once kept top secret, are now widely available. Crowdfunding sites are providing capital for startups, and self-service brokerage firms have opened investing up to the masses.
The formerly fraught relationship between borrowers and lenders is changing, too. Commercial banks still have the standard selection of personal loans, credit cards, and mortgages, but they aren’t the only option available for consumers who need buying power.
Companies like Upstart (UPST), SoFi (SOFI), and Affirm (AFRM) are making it easier to obtain credit. Among other advantages, these companies are looking beyond FICO scores to make lending decisions. Upstart uses Artificial Intelligence (AI) to examine hundreds of data points unrelated to the information available through credit reporting agencies, and SoFi has created an entire community around successful financial planning.
Affirm makes real-time lending decisions when consumers check out their online purchases. The technology immediately increases shoppers’ buying power without the use of high-interest credit cards.
Since its launch in 2012, Affirm has developed an impressive list of retail partners. Affirm’s success had would-be investors clamoring for a piece of the action, and the stock finally made its Wall Street debut in January 2021.
Affirm stock is up 55 percent in three months during the summer/fall of 2021, which is good news for those who bought their shares early. However, the investors who took a wait-and-see approach are a bit concerned. Is Affirm stock a buy at its current price, or is it too late to buy Affirm?
What Makes Affirm Special?
Affirm is essentially a loan made at the point of sale.
When all items have been added to online shopping carts, customers choose Affirm at checkout rather than entering their payment information.
That brings up a brief credit application, and the request is decisioned in moments. Once approved, users choose a payment plan that meets their needs, and they make regular payments according to the agreed-upon schedule.
What makes Affirm special is that there are no unexpected fees like those that regularly appear on credit card statements. That means no annual fees, no late fees, and the only interest charges are the ones outlined at the point-of-sale. In many cases, there is no interest at all.
Affirm makes its money in two ways. First, some customers do pay interest on their purchases. Rates range from 10 percent to 30 percent, depending on the shopper’s credit history.
Second, Affirm receives a commission from the businesses that offer Affirm’s service as an option at checkout. Access to credit increases the likelihood that consumers will say yes to items that are otherwise out-of-reach. That’s a win/win scenario for Affirm and its partners.
Affirm Vs Klarna Vs Afterpay
Affirm isn’t the only company offering point-of-sale credit decisions. Australia’s Afterpay (AFTPF) and Sweden’s Klarna, among others, are hard at work growing their own market share.
For now, Afterpay is only available in Australia, Canada, New Zealand, the United Kingdom, the United States, and New Zealand. Klarna is available in parts of Europe, including the United Kingdom. It is also available in the United States.
Affirm, which is based in the United States, is currently serving the United States only. That gave it a major advantage through 2018 when it held more than three-quarters of the US buy-now-pay-later market.
Today, both Klarna and Afterpay have overtaken Affirm, but many industry experts think that is about to change, and that confidence has driven Affirm share prices up.
Why Did Affirm Go Up?
The biggest news Affirm has had in recent months is a brand-new partnership with Amazon. That relationship gives Affirm an extraordinary advantage over its competitors from a market share perspective, and it has the extra benefit of expanding Affirm’s customer base.
The Amazon announcement came on the heels of Affirm’s June decision that all qualifying Shopify merchants can offer Affirm’s service at checkout. More partnerships mean more consumers have the option of using the service, which equals more revenue for Affirm.
When combined with the company’s promising fiscal fourth-quarter 2021 earnings report, the addition of Shopify and Amazon partnerships have Affirm poised for substantial growth. That attracted the interest of fintech investors, causing share prices to rise sharply.
Affirm has tens of thousands of merchant partnerships, but until recently, one mattered most to top-line results. Affirm generated most of its revenue by extending credit to consumers purchasing equipment from Peloton (PTON).
There’s little to no downside to the Peloton partnership given the high demand for Peloton bikes, but the fact that Peloton generated most of Affirm’s revenue for a time was problematic. The customer mix was not as well diversified as investors like to see.
The dependence on Peloton made Affirm vulnerable for the same reason any overly concentrated portfolio is an issue. A downturn in Peloton’s fortunes would necessarily impact Affirm.
However, the Amazon and Shopify partnerships add substantial diversification to Affirm’s revenue sources – and that’s on top of other relationships that have developed in the past year, such as partnerships with Dick’s Sporting Goods (DKS), Williams Sonoma, and Neiman Marcus.
Can Affirm Stock Keep Going?
Affirm’s fiscal 4Q 2021 results – the period ending June 30, 2021 – left investors and analysts pleased. Gross merchandise volume growth came in at 106 percent, and total revenue increased 71 percent year-over-year.
Active consumers nearly doubled during the period, and by the end of the quarter, the number of active merchants was up more than 400 percent year-over-year.
Guidance from management gave investors reason to be optimistic about the future of Affirm’s stock. Gross merchandise volume growth for fiscal year 2022 is projected to increase by at least 50 percent, and that figure could be as high as 70 percent if Peloton is excluded from the calculations.
It’s worth noting that these figures were determined without incorporating potential benefits from the new Amazon partnership. Once that information is factored in, most analysts believe that Affirm stock will realize additional gains.
What Could Go Wrong?
Naysayers suggest that Affirm stock is just too risky – and not just because of the inherent risk of fintech stocks. Among other potential issues, Affirm faces heavy competition from buy-now-pay-later companies that are anxious to capture large portions of the US market.
Affirm is in a complex space that carries risks associated with financial services on top of the risks that accompany any new business model. Specifically, Affirm is in the business of lending, and too many bad credit decisions will keep the company from becoming profitable.
For the moment, the risks don’t appear to outweigh the benefits of buying Affirm stock because Affirm is taking every measure to avoid succumbing to these issues. The expanded merchant network keeps the competition at bay, and thus far, Affirm’s lending platform has succeeded in weeding out consumers likely to default on their loans.
Is It Too Late To Buy Affirm?
The bottom line is that it’s not too late to buy Affirm stock. In fact, today’s price could be the lowest Affirm will ever be again.
The additional interest and commission will boost Affiirm’s top line without adding much in the way of expenses. That means profitability is just over the horizon.
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.