Affirm (AFRM 0.29%) entered the market with high hopes of out-innovating and overtaking the many other fintech competitors in the "buy now, pay later" market. In 2021, the company experienced large losses and now has an unclear path to profitability. Despite record payment volume, those losses increased in its most recent quarter, leaving investors even more uncertain. The stock price has reflected these concerns, falling 62% from its recent highs in November. And while those shares might recover, the company behind them still isn't looking great.
Affirm and its "buy now, pay later" rivals allow consumers to pay for items in scheduled instalments, instead of using a traditional credit card. Credit card companies like Mastercard and Visa make money by charging their customers compounding interest and late fees. Affirm offers 0% interest in some cases, and simple interest plans with no late fees in others.
For 0% financing, Affirm makes money by charging merchants fees to use its services; those shops pay up in hopes that Affirm's flexible payment options will encourage customers to buy from them. Affirm prides itself on transparency, and on not profiting from customers' mistakes like traditional credit card companies.
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High growth, higher losses
After Affirm reported seemingly strong numbers in Q1, you'd think that the stock would perform well. Its growth metrics looked great from Q1 2021 to Q1 2022: Revenue rose 55%, and gross merchandise volume – the total amount of money customers spent using Affirm – increased over 100%. These great numbers were driven by a partnership with Shopify that brought Affirm more than 12,500 new merchant customers. There are 1.75 million merchants on Shopify's platform, so this growth could continue.
But Affirm's good numbers couldn't outweigh their bad ones. Its operating loss margin swelled from -19% to -61.6% in that same time period. Net losses ballooned from -$3.9 million to -$306 million because of high operating expenses from acquisitions and investments. Pouring money into its growth makes sense for Affirm, but that growth needs to show up in its margins and bottom line.
Zero competitive advantages
In Affirm's annual report, it mentions its network effect: More consumers lead to a stronger ecosystem, which leads to more merchants, which lead to additional products available to purchase via Affirm's plans, which lead to growth, which lead to deeper data insights, which help Affirm offer its customers a better experience. But when you're in battle, having a sword only helps you if you're the only one with a sword – or if you have the biggest sword. Affirm has the smallest sword, in a battle with giants.
Both Paypal and Block offer their own "buy now, pay later" services with customer bases much larger than Affirm's. These larger companies also have much stronger brand recognition. Affirm does have an early mover advantage in the North American market, but it does not seem like much of an advantage due to other competitors having better branding and larger networks.
The BNPL space is a fast-growing niche in the fintech sector. According to Grand View Research, it's supposed to grow at a compounded annual growth rate (CAGR) of 22.4% until 2028. The issue is not the size and growth of the market, but the fragmentation within it.
There are a lot of big names in this $4.1 billion niche. Visa (V -0.75%) and Mastercard announced in 2021 that they were planning to offer their own BNPL products in the future. Visa alone has more revenue than Affirm has gross merchandise volume, along with a much larger network of customers. Affirm could still chip away and take market share away from traditional credit, but that feat looks increasingly difficult.
What's going right?
Affirm is not doing everything wrong. It has a strategic partnership with Walmart to let customers there purchase big-ticket items through Affirm. It also struck a 2021 deal with Amazon to be the massive online retailer's only BNPL option through the next two holiday seasons. Such deals could solidify Affirm's place in the market and potentially help it develop a competitive advantage in a fragmented space. In Q2 of 2022, we will get to witness what effect this had on Affirm's gross merchandise volume (GMV).
Affirm's average active consumer only uses the service for 2.3 transactions annually, since shoppers mostly reserve BNPL for high-priced items. Affirm aims to grow by getting customers to use its services for more and more purchases. From Q1 2021 to Q1 2022, the numbers remained nearly stagnant, growing from 2.2 to 2.3 annual average transactions per customer. It's trying to boost that figure with its upcoming BNPL debit card, which could replace customers' credit cards and get them to buy more things with Affirm. The company will also need to reduce the minimum purchase price at places like Walmart, where customers can only use Affirm's BNPL service with purchases over $144.
Affirm was one of the first North American companies to offer BNPL services, a phenomenal idea with loads of potential. Investors' concerns over Q1 losses sent the stock downwards, but Affirm's unclear path to profitability looks more concerning than its current numbers. Fintech investors should keep an eye on how Affirm's partnership with Amazon affects its results in the next few quarters. Right now, the company offers little to be excited about – but that could change in the future.
