Affirm Holdings (AFRM 9.47%) was one of the hottest fintech stocks of 2021. The buy now, pay later (BNPL) provider had its initial public offering (IPO) at $49 in January 2021, opened at $90.90, and closed at an all-time high of $168.52 last November. But today, it trades at about $35 a share.
Affirm's stock plunged below its IPO price as investors fretted over its widening losses, rising leverage, and the inherent risks of BNPL services. The broader sell-off across higher-growth tech stocks, which was largely caused by inflation and rising interest rates, exacerbated that pain.
But despite that big setback, Affirm still has plenty of bullish backers. The average price target for the stock is still $64 on Wall Street, and only one of the 15 analysts who cover the stock rate it as a sell.
So could this unloved fintech underdog bounce back over the next few years and become the next PayPal Holdings (PYPL 3.54%)? Let's evaluate Affirm's business, how it might benefit from similar secular tailwinds as PayPal, and if it could ever evolve into a comparable company.
Affirm's main mission
Instead of allowing a centralized payment network like Visa and Mastercard to handle each transaction, Affirm performs soft credit checks to facilitate new "microloans" for each purchase.
Affirm splits each purchase into smaller payments without any hidden or late fees, then calculates the interest payments with a fixed dollar amount instead of compounding percentages. That approach enables Affirm to serve shoppers who don't have any traditional credit cards. Its fees for retailers are also generally lower than the swipe fees for credit cards.
Affirm's flexible payment model and lower fees have locked in a lot of consumers and retailers. In its latest quarter, it grew its active consumers 150% year over year to 11 million as its number of active merchants surged from about 8,000 to 168,000. Most of its merchant growth can be attributed to its new partnership with Shopify, but it has also locked in other big partners like Amazon, Walmart, Target, and American Airlines.
Affirm's revenue rose 71% to $870.5 million in fiscal 2021, which ended last June, and it anticipates 48% to 50% growth in fiscal 2022.
It's still tiny compared to PayPal
Affirm is growing like a weed, but it's still tiny compared to PayPal, which ended 2021 with 426 million active accounts, while its peer-to-peer payments app Venmo served more than 83 million U.S. users.
PayPal's ecosystem is also much more diversified than Affirm's. In addition to its namesake digital payments service and Venmo, it also provides back-end payments software through Braintree, high-yield savings accounts with Synchrony Financial, cryptocurrency services, a mobile wallet, and its own integrated BNPL tools. It bundles all of those features together in an all-in-one app for digital financial services.
That's why PayPal is expected to generate more than 20 times as much revenue as Affirm this year. It's also profitable, while Affirm continues to drown in a sea of red ink, posting a whopping net loss of $431 million in fiscal 2021. And analysts expect an even wider loss of $777 million in fiscal 2022.
It's unclear if Affirm's business is sustainable
PayPal now faces some tough questions regarding its future after it abruptly abandoned its goal of hitting 750 million active accounts by 2025.
But Affirm faces even tougher existential questions regarding the sustainability of its core BNPL business. The critics claim Affirm merely provides a subprime lending platform for consumers who can't get approved for traditional credit cards, and that its delinquency rates will rise as inflation and other macroeconomic headwinds trigger an economic downturn.
They also claim Affirm needs to raise its fees to narrow its losses and rein in its rising debt-to-equity ratio -- which doubled year over year from 0.9 to 1.8 in its latest quarter. However, doing so could alienate its merchants and consumers, driving them back toward traditional credit cards.
Furthermore, competition from other BNPL services that are integrated into larger payment platforms -- such as PayPal's Pay in 4 and Block's (SQ 2.54%) Afterpay -- could cause major headaches for Affirm.
Affirm definitely isn't the next PayPal yet
Affirm should continue to grow, but it still hasn't proved that its core business is sustainable. It also doesn't have enough capital to acquire other smaller companies to expand its fintech ecosystem.
Therefore, Affirm is still more comparable to Afterpay, which was acquired by Block this January, and Paidy, the Japanese BNPL platform that was bought by PayPal last September. Simply put, Affirm is a potential takeover target that might fit well into a larger fintech platform, but I don't think it will ever become a fintech giant like PayPal on its own.