Buy now, pay later company Affirm Holdings (AFRM -1.34%) has left many investors scratching their heads and licking their wounds over the past couple of days. The company leaked and then quickly deleted incomplete earnings data in a social-media post that caused the stock to pop, followed by a crash when the full earnings release came.
Now the stock has fallen from the mid $70s to the low $40s in just a couple of days. Admittedly, earnings were a bit of a fiasco with how they came out, but beneath all of this is a rapidly growing business with lots of future potential. Here's why Affirm is a table-pounding buying opportunity today.
A stellar quarter shows strong momentum
Affirm is a buy now, pay later company, where consumers can receive rapidly approval for small loans to purchase items and pay them off over a set number of installments, which are often interest-free.
Affirm makes money from its users with the interest that it charges on some of its loans, and it makes money on merchants by charging fees on transactions. Affirm tracks all of the data, down to the specific item in a given transaction. The company uses this data to become a sales tool for merchants, increasing their shopping cart conversions and average order value. This potentially makes Affirm an alternative to traditional networks like Visa or Mastercard, which charge fees for processing payments but don't bring much other value to the merchant.
However, Affirm's business hopes to go beyond buy now, pay later; it's building its own financial ecosystem that it hopes will not only create an alternative to the existing payment networks, but will also go into other aspects of consumer finance. It's calling this its "super app," the company's smartphone app where Affirm customers already use the buy now, pay later platform, but will soon have additional products and services available like savings accounts and crypto trading.
Image source: Getty Images.
The company needs to expand its network to stand a chance against the existing payment networks, so getting more merchants and consumers on Affirm is vital to its future. Affirm's earnings results for the 2022 second quarter, ended Dec. 31, 2021, was a big step in accomplishing this.
Merchants on Affirm increased 64% from the prior quarter to 168,000; management declared that Affirm processed 1.6% of all online purchases for 2021 Black Friday and Cyber Monday. There are now 11.2 million active consumers using Affirm, a 150% year-over-year increase.
The total value of transactions on Affirm's platform, called gross merchandise volume (GMV), rose 152% to $4.4 billion in the quarter (excluding troubled merchant Peloton). The growth was due partly to the continued rollout of extensive partnerships with e-commerce giants like Amazon and Shopify.
Addressing the market's potential concerns
These great top-line numbers could have caused the momentary spike in the stock's share price, which quickly turned into a crash once the full report was out. What could investors be upset about in Affirm's quarter?
For starters, the company forecast full-year 2022 GMV of as much as $14.78 billion; considering Affirm's GMV through two quarters is already at roughly $7.1 billion, investors could have been looking for a higher GMV estimate now that the Amazon partnership has launched. Management mentioned on the earnings call that it has a multiyear product road map with Amazon, but investors seemed disappointed by the lack of a near-term pop in growth.
Additionally, Affirm's revenue as a percentage of GMV (called a take rate) fell; in other words, it's making less revenue from the transactions on its platform. It's fallen over the past three quarters, from 10.5% to 9.9%, to 8.1% in its most recent quarter.
Management explained that this as due to lower take rates negotiated with significant partners like Amazon and Shopify. Although it could look like a sign that Affirm lacks leverage with merchants, I see it as an effort to build its network as fast as possible. Amazon and Shopify collectively control half of U.S. e-commerce sales.
The stock's valuation is attractive
The stock is now threatening to fall to its lowest price since its IPO, pushing its forward price-to-sales ratio below 10. Shares are down more than 70% from their high of $176.65.
AFRM PS Ratio (Forward) data by YCharts
This valuation seems reasonable, even if you factor in the near-term hiccups that the company's had. I don't think any of these issues are a deal-breaker or a reason to sell the stock.
The long-term benefits of Affirm expanding its network far outweigh the near-term percentage points lost on the take rate, in my opinion. As Affirm builds more products and services on the data it's gaining, there could be future monetization opportunities down the road. In the meantime, Affirm remains a leading buy now, pay later company, which could mean significant growth as the Amazon and Shopify alliances continue to mature over the quarters and years ahead.
