Affirm Holdings (AFRM -1.34%) stock certainly wasn't short on drama in 2021. From a January initial public offering price of $49 per share to a February high near $147, to a May low of $46.50 back to a November peak of $176.65, followed by a slide back to its current price near $79, the buy now, pay later outfit has taken shareholders on quite a roller-coaster ride.
At least a good portion of that volatility can be chalked up to the newness of the stock and the industry. That shouldn't be nearly as much of a factor in 2022, however, now that investors are getting a firm grip on the organization as well as its short-term lending business. From here, Affirm shares are more likely to reflect the underlying business, and less likely to be pushed and pulled by hype and headlines.
Image source: Getty Images.
To this, there are three big matters that will impact the stock's action this year. Current and would-be investors should familiarize themselves with each of them.
Shoppers love buy now, pay later
If you're unfamiliar with the idea, it's simple enough -- buy now, pay later (BNPL) is an alternative to conventional credit cards that allows consumers to make sizable purchases by taking out a short-term loan. Data from C+R Research suggests the average BNPL borrower's total debt is $883, with clothing and electronics being the most common BNPL purchases.
It's a relatively new business built on the premise that conventional credit cards aren't quite right for all consumers. As such, the industry has still only scratched the surface of its potential. Kaleido Intelligence believes the option will generate $258 billion worth of worldwide spending in 2025 alone, growing at an average annual pace of 27% between 2020 and then to reach that mark.
For perspective, the most recent look at Affirm's loan portfolio indicates it's worth a little over $2.2 billion, with a huge chunk of that business being the result of spending preferences developed during 2020's pandemic lockdowns. As one of the bigger names in the business, Affirm is positioned to capture a major piece of the industry's growth.
Consumer creditworthiness is falling
The BNPL industry's growth is coming at a price of sorts, however, and Affirm is no exception.
The inherent problem in making it easier for consumers to spend money is, it's only a matter of time before they use the option irresponsibly. To this end, LendingTree says two out of three BNPL users admit these loans have caused them to spend more than they normally would have. Accordingly, a Qualtrics survey commissioned by Credit Karma suggests roughly one-third of BNPL borrowers have fallen behind on their payments. Although one of the key purposes of BNPL services is to secure a short-term installment loan without a credit check, Credit Karma adds that a third of these borrowers have seen their credit scores suffer once they get behind on their payments.
Affirm is seeing the same worsening dynamic in its own loan portfolio. Non-delinquent loans have slipped from 97.5% of its portfolio as of March of last year to 94.7% as of the end of September. Conversely, past-due loans have grown from 2.4% to 5.3% of its loan portfolio during this six-month stretch.
Data source: Affirm Holdings. Chart by author.
In purely numerical terms, the change is nominal. When you're talking about the performance of a loan portfolio, it's a significant shift. Also notice the direction of the shift, which may continue as the company expands its reach.
Regulators are looking
It's not as if some consumers' growing debt burden and subsequently deteriorating credit scores have gone unnoticed. Although the BNPL business has thus far escaped much regulatory scrutiny, in December the U.S. Consumer Financial Protection Bureau opened an official inquiry of five different BNPL lenders, including Affirm. The Bureau explains that it is "concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology."
Nothing's come of the probe yet. And it's possible nothing ever will. For any federal government body to start scrutinizing the entire industry, however, opens the door to potential legislation that could crimp or even outright cripple the BNPL business as we know it.
Too many unknowns
None of this is to say Affirm is destined for disaster. Even if the aforementioned challenges evolve into full-blown problems, the premise has been proven. Affirm might have to adapt, but with analysts' calls for another 47% worth of top-line growth this year that will push the company closer to profitability, there's room for change.
Data source: Thomson Reuters. Chart by author.
The fact is, there are simply too many unknowns to make a bold, blind bet on the stock. That's true even with Affirm's share prices down 56% from November's peak, seemingly ripe for a rebound. At best it's a speculative trade until we see more of the matters described above unfold.
