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Why Is Everyone Talking About Affirm Holdings Stock?

By Leo Sun – Updated Nov 8, 2021 at 5:37PM

Key Points

  • Affirm’s stock price has more than tripled since its IPO in January.
  • A recent deal with American Airlines is attracting more bulls.
  • Affirm is still heavily dependent on Peloton, which recently posted disappointing guidance for the rest of fiscal 2022.

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The buy now, pay later company continues to attract a lot of attention.

Affirm Holdings (AFRM 1.56%), a provider of buy now, pay later (BNPL) services, became a hot stock in late August after it partnered with Amazon (AMZN 2.10%) to process some of the e-commerce giant's payments.

Affirm recently became a hot topic again following two major developments. First, Affirm's stock rose in late October after it struck a deal with American Airlines (AAL 2.15%) to offer BNPL options for its ticket sales. But in early November, Affirm's stock dipped after Peloton Interactive (PTON 3.42%), its largest client, posted dismal guidance for the rest of its fiscal year.

Let's see if the good news outweighs the bad news, and if Affirm's stock is still worth buying after it more than tripled from its IPO price back in January.

A clock and a jar of coins.

Image source: Getty Images.

Affirm expands into the air travel market

Affirm's new partnership with American Airlines will allow customers to split the cost of flights that exceed $50 into monthly payments.

The option will be initially offered to "select" customers in the U.S. before being rolled out nationwide over the "coming weeks." As with its other partnerships, Affirm says it won't charge any hidden or late fees, and that any interest-bearing payments will be calculated by a fixed dollar amount (rather than a compounding percentage) which never increases.

Affirm says that 74% of Americans it recently surveyed said they would spend "more on travel this holiday season than ever before," but that 60% were concerned that they couldn't "afford to travel as they would like to."

That disparity, along with a growing aversion toward the fees and compounding interest rates on traditional credit card payments, might make Affirm a popular checkout option for holiday travelers.

However, Affirm didn't reveal if American Airlines would charge interest-bearing or interest-free payments. But the partnership could be similar to Affirm's deal with Amazon, in which it charges some customers interest and provides others interest-free payments based on their credit scores.  

Affirm's deal with American Airlines could boost its merchant network revenue, which rose 48% in fiscal 2021 (which ended in June) and accounted for 44% of its top line. But the impact on its interest income, which grew 75% and accounted for 37% of its top line, is still too difficult to quantify.

But Peloton's pain could offset those gains

In fiscal 2021, Affirm generated 20% of its revenue from Peloton, the connected exercise bike maker that experienced a major growth spurt during the pandemic. That's down from 28% of its revenue in fiscal 2020.

A Peloton exercise bike.

Image source: Peloton.

Peloton's revenue doubled in fiscal 2020, then surged another 120% to $4.02 billion in 2021. But red flags appeared over the past year. It recalled its Tread+ treadmill in May due to safety issues, then significantly reduced the prices for its bikes in August as it faced escalating competition, rising inventories, and softer post-pandemic demand.

In early November, Peloton estimated its revenue would only rise 9%-19% in fiscal 2022, compared to its prior forecast for 34% growth. That stunning slowdown sank Peloton's shares and spooked Affirm's investors.

Affirm has been gradually reducing its dependence on Peloton by signing these big partnerships with Amazon, Walmart, Target, Shopify, and American Airlines, but Peloton's big guidance cut could offset a lot of those gains.

In early September, Affirm predicted its revenue would rise 33%-37% in fiscal 2022. That's still an impressive growth rate, but it would represent a significant slowdown from its 71% growth in fiscal 2022.

At the time, Affirm predicted its gross merchandise volume (GMV) would rise "at least 50%" in 2022 on a reported basis, or 70% after excluding Peloton along with any potential gains from its Amazon partnership.

That confident forecast indicates Affirm's core business still generates strong organic growth on its own. However, Affirm's stock is already priced for perfection at nearly 40 times this year's sales -- so investors should expect any bad news about Peloton or its new partners to weigh down its shares.

Is Affirm's stock worth buying?

Affirm has impressed a lot of bulls with the growing adoption of its BNPL services and its ability to disrupt traditional credit card companies.

However, Affirm is still deeply unprofitable, and it faces tough competition from diversified fintech companies like Square, PayPal, and Adyen, which are all rolling out new BNPL services with big acquisitions or partnerships.

I'd prefer to invest in one of those three fintech companies instead of Affirm. Affirm's customer concentration issues are troubling, its stock is expensive, and its opaque, merchant-specific interest fees make it difficult to quantify the true value of its headline-grabbing partnerships with Amazon, American Airlines, and other large companies. The company still has a lot of growth potential, but it's simply too risky to recommend at these frothy levels.  

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Square. The Motley Fool owns shares of and recommends Adyen N.V., Affirm Holdings, Inc., Amazon, PayPal Holdings, Peloton Interactive, Shopify, and Square. The Motley Fool recommends Adyen and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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