Financial-technology stocks such as PayPal Holdings and Square have wowed investors in recent years as digital payments take over the financial industry.
Now, recent IPO Affirm Holdings (AFRM -2.08%) has become the latest fintech stock to pique investors' interest, as shares surged following the company's January IPO only to pull back sharply through March, potentially offering investors a good buying opportunity.
Affirm's value proposition is that it aims to disrupt the credit card industry by providing consumers with a straightforward way of buying now and paying later (BNPL) without the late fees and hidden charges that often accompany credit card payments. For merchants, the company provides a way of bringing in new customers, including through Affirm's customer database, and the company shares data with merchants as well.
Keep reading to see three reasons buying Affirm stock could be a smart move.
Image source: Getty Images.
1. Merchants hate credit cards
When you're trying to disrupt an industry, it helps when that industry is hated. The genesis of Netflix came about because co-founder Reed Hastings was annoyed at having to pay late fees at Blockbuster, something most customers hated about video stores, and Netflix famously promised "no late fees" in its early advertising.
Retailers have long seen credit cards as a thorn in their side. While accepting plastic can help them score sales from customers who may not have the cash on hand, most customers use credit or debit cards simply because they're convenient, offer rewards, and allow them to avoid carrying cash.
However, merchants often pay 2% to 3% in swipe fees every time a customer uses a credit card, and those fees add up in a low-margin business. Walmart, the world's biggest retailer, has warred with Visa repeatedly over credit card charges, and its Canadian arm even declined to accept Visa cards at one point, saying its swipe fees were too expensive.
Affirm isn't exactly a direct substitute for credit cards, but it is an alternative, and its pitch to customers of a simple, fixed payment schedule without surprise fees has been successful thus far. While merchants often end up paying a similar fee to Affirm, many of them are happy to support an alternative to credit cards, especially if it can provide additional benefits the way Affirm does. As of last Sept. 30, the company had signed up more than 6,500 merchants, including Expedia, Poshmark, and Gucci.
2. The market opportunity is huge
The credit card industry is massive, with Visa and Mastercard handling trillions of dollars in payments annually, but the buy now, pay later segment is just a small percentage of that market right now. In Affirm's most recent quarter, gross merchandise volume rose 55% to $2.1 billion, showing that the company is growing briskly and the platform is beginning to reach a significant scale.
In addition, the company has a number of tailwinds that should enable it to further penetrate the payments market, like its upcoming Affirm card, the first debit card with direct access to pay-over-time functionality, offering its BNPL financing with the convenience of a credit card.
The company's business is also closely linked to e-commerce, which offers a convenient portal for attracting new customers to Affirm, and e-commerce growth soared last year because of the pandemic. In its own prospectus, Affirm laid out its opportunity, saying, "We believe we have a substantial opportunity to increase our share of the e-commerce market, grow our offline business at merchants, and continue to displace customer acquisition and marketing spend by merchants."
Affirm tends to be used for big-ticket items, but the company aims to expand to higher-frequency purchases as well, which will help grow its market closer to the multitrillion-dollar opportunity that Visa and Mastercard enjoy.
3. The reopening could be a major tailwind
Americans will be eager to spend on things they've been deprived of during the pandemic, including travel, restaurants, and entertainment. That's potentially an excellent growth opportunity for Affirm, as the company could capitalize on merchants' need to bring in revenue -- and consumers borrowing in order to take a flight to see family, or spend on a new wardrobe now that they have a reason to leave the house.
Affirm already counts among its merchant base leading online travel agencies Expedia and Priceline, a sign that travel seems like a natural use case for a BNPL product like Affirm. The company recently teamed up with VRBO and vacation rental company Vacasa, showing strong interest from travel businesses.
Affirm has a diverse mix of merchant partners, including pandemic winners such as Peloton, but the company noted that revenue from travel, hospitality, and entertainment declined significantly during the pandemic. As pent-up demand for those categories comes back over the coming quarters, Affirm could surprise investors with better-than-expected results. The company called for revenue growth to slow significantly following a strong performance in its fiscal second quarter.
That, along with the long-term opportunity and the stock's recent pullback, gives it a lot of upside potential from here.
