Despite Affirm actually posting better-than-expected results and offering guidance that topped analyst forecasts, the stock ended down 21% for the day, bringing its total losses for the past year to almost 60%.
That's hardly a stellar performance for the 10-year-old installment payments company that just went public a year ago. It's clear the bears have been right about Affirm so far, but do the bulls have the better long-term case for the stock? Let's weigh both sides.
The bear case
There are several arrows in the quiver of Affirm bears that have been on target lately. Buy now, pay later (BNPL) is a quickly growing field with a lot of players vying for a slice of the pie, and Affirm is not the top dog.
That title is held by the better-known, privately held Swedish global payments brand Klarna, which could be worth as much as $50 billion to $60 billion after another round of financing. In contrast, after its haircut, Affirm is valued at around $15 billion.
Despite their size, their business models are essentially the same in that they offer credit to consumers to buy more goods. While arguing that they offer a more consumer-friendly product, it's still a credit service in the end -- and Affirm's provision for credit losses quadrupled in the current quarter, even as active customers jumped 150% to 11 million and transactions per active consumer rose 15% for the period.
Delinquencies are also beginning to soar. While the number of loan receivables on Affirm's balance sheet grew 9% in its fiscal first quarter to $2.1 billion, and over 94% were not delinquent, that's actually down by two percentage points from its fourth-quarter tally. Delinquencies began to turn slightly lower late in the second quarter.
Loans that are delinquent by less than 30 days jumped 37% in that time frame. Those late 30 to 60 days rose 53%, those behind by 60 to 90 days jumped 46%, and those up to six months behind on their payments doubled.
While Affirm has a number of big-name merchant accounts, like its recent partnership with Amazon.com (AMZN 0.91%), they're actually working against it.
Affirm's guidance for the coming quarter forecast higher-than-expected volume, but lower revenue, suggesting Amazon was affecting Affirm's "take rate," or the amount of money it gets to keep from each transaction. Peloton Interactive (PTON 3.06%) has also been one of Affirm's biggest merchant accounts, and its implosion is having a negative effect on Affirm from the downdraft.
Barron's quotes David Trainer, the CEO of investment research firm New Constructs, as saying investors should sell Affirm stock because "it is losing market share, lacks competitive advantages, is unprofitable, and faces intense competition."
The bull case
The BNPL field is crowded as the bears contend, but it's also growing rapidly, meaning it can support many players. While installment payments are still debt to consumers, customers themselves view it as a more favorable, disciplined form of debt than putting a purchase on a credit card.
A survey by The Motley Fool's The Ascent last year found almost 56% of consumers used a buy now, pay later service, up from 38% in July 2020 -- an increase of almost 50% in less than one year. Most did so to avoid paying credit card interest.
The industry is expected to see some $680 billion in transaction volume globally by 2025, two and a half times more than what was transacted in 2018, or a 13.2% compounded annual growth rate.
Merchants are also flocking to Affirm, which saw the number of active merchants swell from 8,000 a year ago to over 168,000 today -- a massive 2,000% increase driven mostly by its partnership with Shopify (SHOP 2.58%).
And while Amazon is helping to drive more transactions for Affirm, as the dollar value of its transactions jumped to $4.5 billion from $2.1 billion a year ago, the BNPL company pointed out that they doubled even without Amazon.
CFO Michael Linford says that "we're still well in excess of the high growth phase. We're in the hyper-growth phase for the stock."
Affirm accidentally released an image of an earnings chart earlier than intended, causing the BNPL shop to release its results several hours ahead of schedule. This misstep triggered the start of the stock's decline, as investors scrambled to react to the unexpected data delivery. Yet Affirm's business still looks solid and strongly growing, despite the reporting snafu and the arguments that the bears make.
Don't dismiss those points, because they are important, and an investor should watch them closely to see if Affirm's situation worsens. But simply because BNPL is a credit service and some consumers are finding it difficult to pay is no reason to cast this stock aside.
Affirm says it has proprietary software to model its business on that catches more potential problems than just relying upon FICO scores, and it has an interest-bearing component to its model so it's not only reliant upon merchant fees.
That makes Affirm a strong company still, and it's one that investors ought to look at closely, now that the fintech stock has been severely discounted.