What Is The Future of Affirm Stock?

In 2012, Max Levchin, the co-founder of PayPal, established Affirm Holdings, Inc. (NASDAQ:AFRM) to help customers avoid falling into the pit of obscure bank terms and hidden fees. Its mission is to offer a clear and personalized credit option without credit cards or any other sweeping business rules.

The startup Affirm was created to facilitate instant financing for online purchases right at the checkout page. Unlike making the full payment right away, clients can split their purchases into various parts with no interest charge. The concept appealed to the young for transparency and flexibility in the manner in which they deal with their financial transactions.

Affirm started to take-off after partnerships with a number of eCommerce retailers, giving shoppers an alternative payment method — by using Affirm. The strategic move increased its visibility and reach in the e-commerce market. In January 2021, Affirm went public through a highly anticipated initial public offering (IPO).

Let’s dive deeper into unlocking Affirm’s story…

What Is Affirm’s Business Strategy?

The buy-now-pay-later company has an all-inclusive strategy for growth that is designed to provide value for both consumers and merchants.

Affirm has launched Affirm Debit+ as Affirm Card and optimized Adaptive Checkout tools as ways to improve consumer experiences and boost conversion rates for merchants.

It is also increasing consumer dependency thanks to customer-friendly integrations with partner checkouts. The aim is to diversify into consumers’ daily and in-store payments.

With Affirm Card, one of the key tools in a strategy set, management is looking to heighten the level of engagement as well as transaction volume.

Growing the consumer base is also one of the firm’s strategic objectives, which is largely a function of marketing efforts such as promotional campaigns and advertisements that broaden awareness and attract new clients. 

Further, it is focused on merchant reach expansion, including both the broader segment of existing partners and new merchant acquisition as a result of dedicated marketing efforts and smooth API integration.

Plus, technological infrastructure plays a key role in enabling such programs, with a cloud-based platform that makes data management and decision-making more efficient. The technology investments serve to both simplify consumers personalized experiences yet remain scalable for merchants.

The sales and marketing strategy is focused on finding cost-effective plans and using brand marketing and partnerships to expand the merchant base and consumer adoption.

In essence, Affirm’s development policy rests on innovation, customer-centricity, and technological advancements and so far has generated more than 17 million active consumers and over $24 billion gross merchandise volume as of the quarter ended March 31, 2024.

Who Competes with Affirm?

Affirm’s main competition stems from legacy payment methods such as credit cards or debit cards, including those offered by traditional banks such as Synchrony, J.P. Morgan Chase, and Citibank, along with other tech solutions provided by companies like Visa and MasterCard.

Mobile wallets like PayPal and Apple and pay-over-time options implemented by firms like Block and Klarna also pose real threats.

In addition, merchants frequently introduce their own pay-later alternatives, sometimes found together with Affirm’s options at the checkout stage.

It’s also in competition with technology-savvy firms and digital payment intermediaries are making headway against traditional financial institutions. Although there are competitive pressures, Affirm has numerous competitive advantages.

Nonetheless, there are many competitors that are bigger in size and have advantages like diversified product offerings, larger consumer and merchant segments, and operational efficiencies.

The competition from rivals that have extensive experience in the market, established relationships with consumers and retailers, and brand recognition are serious challenges to Affirm’s market penetration. 

How Does Its Financial Model Work?

Affirm makes money from both merchants and consumers. Merchant fees are charged when providing the service, with larger fees likely connected to 0% APR financing products. No late fee or penalty is charged to consumers.

Moreover, Affirm also offers virtual card issuance to consumers, and it gets a share of interchange fees when they use these cards for transactions.

During 2021-23, Pay-in-4 represented 11%, 22% and 19% of the GMV total that was facilitated through its platform, and 0% APR Core loans represented 32%, 21% and 13% of the GMV total.

For consumers, interest income is generated from simple interest loans, with rates varying based on factors like transaction risk and creditworthiness. Over the same period, interest-bearing loans represented 57%, 58%, and 68% of total GMV facilitated through its platform, respectively.

Affirm also earns from its loan origination and servicing model. The company services all loans, earning a servicing fee, and partners with sub-servicers for customer care and collections, ensuring operational flexibility. It directly originated approximately 18% and 21% of loans over the past couple of years.

Additionally, total revenue grew 51% year-over-year to $576 million in the most recent quarter, with revenue as a percentage of GMV increasing to 9.2%, compared to 8.2% in the same period the prior year. Gross Merchandise Volume (GMV) grew by 36% year-over-year to $6.3 billion.

Operating income came in at a $161 million loss, compared to a $310 million loss in the prior year quarter. Operating margin was negative 28% in the period, compared to negative 81% in the year-ago period.

The company announced a restructuring plan on February 8, 2023 to alleviate margin pressure arising from macroeconomic challenges. Thereafter, the company cut its workforce by around 500 people, which accounted for about 19% of its staff.

What Is the Future Of Affirm Stock?

The future of Affirm stock is relatively bright with analysts forecasting close to 20% upside to fair value of $36.93 per share.

They don’t expect the stock to be profitable this year, however. And so it should be noted that in spite of narrowing losses, it has yet to make money in a market saturated with swelling competition posed by well-funded rivals.

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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.