What happened
Shares of the buy now, pay later (BNPL) lender Affirm (AFRM -1.22%) fell as much as 16% today before rebounding some in the last hour of trading when it only traded down about 11%. There does not seem to be an obvious reason behind the move.
So what
Despite its lack of profitability, investors just a few months ago had driven Affirm's stock up to a more-than $40 billion market cap. In August of last year, Affirm partnered with Amazon to deliver its BNPL option at checkout.
Image source: Getty Images.
But the magic began to fade for all fintech stocks with premium valuations after the Federal Reserve sped up the tapering of its bond-buying program and indicated it may raise interest rates multiple times this year.
That seemed to spook investors as higher rates create higher defaults on loans and can lead to less loan demand as well. There had already been a lot of questions around credit quality in the BNPL space. Then the Consumer Financial Protection Burea (CFPB) recently requested data from several large BNPL firms, including Affirm.
Now what
There has been growing concerns in the BNPL space about credit quality, with more than one-third of consumers who have tried BNPL missing at least one payment as of September. Furthermore, credit bureaus are starting to include these plans into credit scores.
While Affirm has huge potential, and there is no evidence that BNPL is slowing down, I am going to sit on the sidelines for now with the company still trading at a high valuation amid much uncertainty.
