The financial industry has been a hotbed of innovation in recent years. The ways people bank, manage their money, and pay for things are undergoing major shifts as new companies emerge to meet the evolving needs of consumers.
One hot retail trend recently has been buy now, pay later (BNPL), which is changing how consumers, and companies, view credit. Among the leaders in this niche is Affirm Holdings (AFRM 3.06%), and it has seen sharp revenue growth since it went public in early 2021. It's also just getting started.
Here's why Affirm is a growth stock to consider for the long term.
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A leader in buy now, pay later
Affirm's app allows users to pay for the items they buy from participating businesses in installments. It instantly assesses each customer's credit and approves or rejects a specific purchase via BPNL in seconds. If the customer is approved, Affirm provides a range of fixed-installment payment options based on the cost and any interest charged.
Affirm doesn't always charge interest on BNPL purchases -- 43% of its loans don't -- but when it does, that cost is factored into the fixed payments upfront, giving users a better understanding of their overall purchase costs. Affirm's service can be used for both online and in-person transactions, and it has been integrated into the payment systems of many major retailers, including Walmart, Amazon, Shopify, as well as more than 2,000 retail partners. It charges neither late fees nor annual fees.
Affirm generates its revenue by charging fees to the merchants for each transaction, as well as by charging interest. Affirm underwrites the loans, along with two banking partners.
BNPL is an alternative to using traditional credit cards. Many consumers, particularly younger adults, are more averse to racking up massive debt and see this as a more manageable option. In fact, major credit card and payment companies have recognized the concept's potential, either acquiring or launching their own BNPL services.
Founded in 2012, Affirm went public in January 2021 at about $90 per share, and since then, the stock has had a pretty wild ride. Its price climbed as high as $176.65 per share in November, only to drop about 54% over the next two months. As of Tuesday afternoon, it was trading below its IPO price at about $81 per share. On Jan 3, it fell about 10% in a sell-off and is down about 14% year-to-date.
The stock got caught up in the overall market decline this fall, which hit payment companies particularly hard as concerns grew about an economic slowdown due to inflation and the sharp rise of new COVID-19 cases due to the omicron variant. Also, it was no doubt hurt by a mid-December announcement from the Consumer Financial Protection Bureau (CFPB) that it was launching an inquiry into the practices of five BNPL services, including Affirm.
Explosive growth
Investors shouldn't be too concerned about that swoon. In fact, the price drop makes it a good time to buy the stock. The revenue growth numbers for Affirm continue to be excellent, and the company has strong tailwinds that should push its stock higher over the long term.
In its fiscal first quarter, which ended Sept. 30, the company generated $269.4 million in revenue, up 55% year over year, with about $112 million coming from fees and $117 million from interest income. Gross merchandise volume jumped 84% to $2.7 billion while the number of active users climbed 124% to 8.7 million. The number of active merchants skyrocketed from 6,500 to more than 102,000, due in large part to Affirm being added to the Shopify platform. The company is still operating at a net loss, though, as its operating expenses have been increasing due to costs associated with acquisitions as well as investments in technology, marketing, and overall operations.
One potential area of concern for investors relates to the company's higher provision for credit losses -- that hit $63.6 million in fiscal Q1, up from $28.9 million during the prior-year period. Part of that increase was due to the growth of the business, but it was also driven by the fact that the delinquency rate of Affirm's customers increased slightly at the end of its previous fiscal year to around 4%.
Affirm exceeded its revenue targets for the first fiscal quarter and raised them for fiscal Q2 (to $330 million from $320 million) -- and for its full fiscal 2022 (to $1.25 billion from $1.22 billion). Part of that was due to its expanded relationship with Amazon. Also, the company is preparing for the broad rollout of its Affirm Debit+ card in 2022, which is a debit card that works with the user's regular checking account but enables installment payments. Affirm already has more than 1 million customers on the waitlist for this product, which could significantly expand its universe of users.
Overall, BNPL is an industry that is poised to take off. About 55% of Americans have used BNPL, up from 37% in 2020, according to research by The Motley Fool's Ascent.
Further, by 2026, approximately $995 billion will be spent using BNPL, up from about $226 billion in 2021, according to Juniper Research. That presents an annual growth rate of about 34%.
With its current drop in valuation, the price-to-sales ratio has come down to about 22, which is about half of what it was when it spiked over 40 in October and November. This stock may continue to see some short-term volatility, particularly with the CFPB inquiry looming, but long-term, as one of the leaders in the space, is in a great position to ride the BNPL wave.
