Affirm Holdings (AFRM -0.90%) has been an early 2021 IPO dud, with a first-day closing price of $97 that's lost almost 30% of its value since then. 

The financial technology, or fintech, company provides buy now, pay later services for customers with no late fees, as well as savings accounts with high interest rates. Buy now, pay later has increasingly become a popular payment option for shoppers who are tired of endless and unclear credit card interest payments. Affirm has a growing member base and sales, and its target shopping experience features predominantly high-end products, making them accessible to a market that might otherwise not be able to afford the high prices. The large and growing active customer base confirms that this is a business that's going somewhere.

Let's see what investors can expect from Affirm in the future -- is this a great growth stock?

An increasingly popular way to pay

Affirm has partnerships with nearly 8,000 merchants and has reached 4.5 million active users as of the end of 2020 (the company's fiscal second quarter). It offers benefits for both merchants and customers, with payment plans for users and more sales for merchants.

A woman paying with a credit card through her mobile phone.

Image source: Getty Images.

It's clear why this is taking off as a popular payment option for both e-commerce and physical shopping (customers can get a one-time code through Visa to pay in-store). Lower-priced purchases don't come with any interest, and for bigger purchases, customers can choose from installment options with built-in interest payments that don't change.

Based on industry data, Affirm says more than 70% of millennials prefer to shop online, and more than 230 million Americans fall into its target shopper categories of millennials, Gen Z, and Gen X. U.S. e-commerce is a $600 billion market, with a total $5.4 trillion retail market, of which Affirm has a tiny percentage. The market for Affirm's services is huge and growing, and as consumer preferences move online, Affirm can be a great growth story.

And the numbers look good. In Affirm's second quarter, its first as a public company, revenue increased 57% and gross merchandise volume rose 55% to more than $2 billion. So why the pessimism on Wall Street?

Creating competitive advantages

There are several companies operating in this space, such as Klarna and Afterpay. Klarna, which is based in Sweden, has 250,000 merchants and 90 million active customer accounts, including 15 million in the U.S. Afterpay, which is based in Australia, has more than 55,000 merchant accounts and about double Affirm's customer count.

Those are tough numbers to match. Affirm sees its competitive advantages in its easily scalable proprietary technology, its ease of use for both customers and merchants, and its trusted name. A large portion of its merchant base sells expensive products, and the Affirm option opens up purchasing options for customers.

As the market for these services expands, there's room for more than one player. A customer who finds payment plans useful is likely to use any of the buy now, pay later companies, and as long as Affirm can sustain relationships with merchants, it's likely to see continued growth. It's also expanding its services, and as multi-use fintech company, is has a lot more value.

For now, at least, Affirm is not profitable. As the company makes more sales, that should eventually change, but it's only expecting 30% to 33% sales growth in the third quarter, which takes it out of high-growth territory and makes it harder to become profitable. It's projecting around a $50 million operating loss in the third quarter, and a $120 million to $130 million operating loss for fiscal 2021.

Meanwhile, Afterpay, which was started five years ago, it already profitable. Affirm, which was founded in 2012, is taking longer to catch up. But competitors' successes demonstrate that it can be a profitable industry.

Another potential worry is that Affirm is fairly dependent on its largest customer, Peloton Interactive, which accounts for around 30% of total revenue. The company is adding merchants and services to diversify, but it's not there yet.

Not without risk

Regardless of the competition, I think Affirm has carved out a nice niche for itself, with happy customers and merchants. This is its bread and butter, and as the market grows, and Affirm keeps and grows its merchant base, there is lots of growth ahead. Its competitors may be bigger at the moment, but there's room for Affirm to gain market share as more people shift to e-commerce.

It has also demonstrated that it can launch new, complementary products, which is going to be important if it wants to stand out from what's becoming a crowd. It's likely to turn a profit at some point, but it won't be in 2021, according to Affirm's guidance. 

There's a lot of long-term opportunity here as digital adoption accelerates and customers see buy now, pay later as a real benefit to buy expensive products. But with a lot of short-term uncertainty pertaining to Peloton, profits, and growth prospects, it also comes with a lot of risk.