The buy now, pay later industry took off in 2021. Consumers have embraced the option to go shopping and pay off their purchases in a fixed number of (sometimes) zero-interest payments. Affirm Holdings (AFRM 0.96%) is among the leading companies in the buy now, pay later (BNPL) space -- it went public in Jan. 2021 at $49 per share.
The stock surged as high as $176 in November before steadily plummeting, including a 42% decline year to date. Why have investors turned their backs on the stock, and should you buy, sell, or hold it?
Why Affirm stock is plunging
Affirm's downfall seems driven by a few factors. First, high inflation and the potential for rising interest rates have spooked the market overall, resulting in significant downward pressure for most growth and technology stocks. In the Nasdaq, for example, less than one-fifth of the more than 2,500 stocks in the index are above their 200-day moving average, a sign that market sentiment is overwhelmingly negative.
Image source: Getty Images.
Beyond those big picture woes, a recent report from Credit Karma showed that nearly 34% of BNPL users it surveyed said they were behind by at least one payment. The idea of loan defaults is an obvious problem for any lending business, so this is likely contributing to the skepticism investors now have for the overall BNPL concept.
But is this true for Affirm specifically? Looking at the company's most recent quarterly filing, Affirm's total loan receivables (active customer balances) totaled $2.23 billion. Approximately $2.11 billion of that is non-delinquent, or about 95%. In other words, a little over 5% of Affirm's active loan balances are behind on payments, a far cry from the 34% of users Credit Karma cited in its report. This is something investors should monitor moving forward, but it seems that Affirm is doing well originating its loans.
Big-time partnerships could mean rapid growth
Meanwhile, Affirm could be at the beginning of a period of accelerated growth. It's formed several strategic partnerships with crucial e-commerce partners, including Shopify, Amazon, Target, and Walmart.
Most of these partnerships are in their early stages, and results haven't begun to flow through to Affirm's financials yet. Amazon implemented Affirm's BNPL offering for the holiday season, so investors should look for a jump in growth as early as the next quarterly report. Meanwhile, Shopify expanded its Affirm-powered "Shop Pay," which helped Affirm's merchant count surge 1,468% year over year to 102,200 in the fiscal 2022 first quarter.
Data by YCharts.
The chart above shows how analysts have increased their revenue estimates for the next fiscal year. Amazon owns roughly 50% of the e-commerce market in the U.S., so that partnership presents a massive opportunity for Affirm's growth over the coming quarters and years.
The stock is on sale
The stock's decline has helped its valuation cool off. The price-to-sales ratio was more than 40 at its peak, but it has fallen to 15 as of this writing.
Data by YCharts.
It's still no bargain at this level, but suppose you're taking a long-term view of the stock. In that case, with major partnerships set to boost Affirm's results going forward, plus the looming launch of its Debit+ card this year, the valuation is low enough that future revenue growth could burn off any additional "froth" in the share price reasonably quickly.
The verdict: Buy, sell, or hold?
To recap, Affirm has deals in place with the biggest e-commerce and retail brands in the world while also benefiting from the tailwind of a BNPL industry that could grow gross merchandise volume 15-fold by 2025. Additionally, the stock has fallen enough that the valuation has gone from nosebleed expensive to approachable for long-term investors.
I think it's obvious what my verdict is, but I'll say it anyway: Affirm stock is an obvious buy at these levels if you believe in the BNPL business model. Affirm's recent initiatives are game-changing with the potential to create network effects for the business that make it a dominant player in the consumer finance space for years to come.
