The way people pay for things is changing rapidly, as new technologies and platforms emerge that accelerate the transformation of payments. One fintech that has had an effect on the industry is Affirm Holdings (AFRM -2.74%). This buy now, pay later company had a meteoric rise after its initial public offering (IPO) in early 2021, but has dropped sharply since then and is now worth less than the day of its January 2021 IPO. But many overpriced fintechs have suffered the same fate in this volatile market cycle.
Meanwhile, one of the biggest brands and most established names in the payment industry, American Express (AXP -1.33%), is beating the market this year, up about 14%. It is among the very best performers in this industry over the past year. But is it too late to buy? Does it make more sense to invest in a beaten-down Affirm? Letʻs take a look to see which of these competitors is the better buy right now.
Affirm Holdings is one of the leaders in the emerging buy now, pay later (BNPL) space. BNPL is considered an alternative, or perhaps competitor, to credit card companies because it lets consumers pay in installments. At the point of sale, whether that is online or in person, consumers use the Affirm app to make payments. The Affirm technology instantly assesses your credit and approves, or denies, the payment in seconds. If approved, the app presents multiple installment payment options for the consumer to choose from.
Many purchases are interest-free, but in cases where interest is applied, it's factored into the installment payment options upfront, so the interest doesnʻt compound.
Affirm makes most of its revenue from fees charged to the merchants for every sale, along with interest when applicable. Since Affirm is not a bank, it partners with banks to provide the loans, so it must split the interest revenue with its partners.
One of the perks of BNPL in general is that it has no late fees, but this has led to high delinquency rates, as a survey last fall by Credit Karma indicated. However, on the fiscal year second-quarter earnings call for the period ended Dec. 31, chief executive officer and founder Max Levchin said Affirmʻs delinquency rates were lower in 2021 than in the two previous years, and lower than many of its competitors, crediting Affirm's more robust underwriting.
Affirm has been growing rapidly, with gross merchandise volume (GMV) up 115% in the latest quarter, year over year (YoY), to $4.5 billion. Active merchants are up to 168,000 from 8,000 a year ago, thanks to its placement in the Shopify platform, and active users are up 150% to 11.2 million. Net revenue was up 77% YoY to $361 million, but the company remains unprofitable and recorded a $159 million net loss in the quarter due to high expenses. Since it went public, it's had quarterly net losses ranging from $150 million to $300 million.
Affirm inked a deal last year to provide BNPL services for Amazon, and Affirm expects that to increase GMV by about 76% in fiscal 2022. But overall, revenue projections were lower than expected for the fiscal third quarter, so keep an eye on those Q3 numbers.
American Express is a credit card industry giant that doesn't need the same type of introduction. The stock is up about 14% year to date, which is far better than most on the market.
While it is a credit card company, it is unlike the big two in that it has a closed loop network, meaning it issues cards, lends the money, and processes the payments. Visa and Mastercard just process the payments. So, American Express earns revenue in multiple ways -- from interest on its loans, merchant fees, and cardmember fees.
American Express has performed well this year for a few reasons. One, interest rate hikes are a positive for American Express, as it is essentially a bank and will earn more interest income as rates rise -- just like banks will.
Two, American Express cards are widely used for travel and entertainment expenses, because of the perks and rewards they offer. Those areas, especially travel, are expected to be higher this year than they have been the past two years. Travel and entertainment spending was at 82% of 2019 levels in early January, and that number is expected to rise in 2022. Three, American Express cardholders tend to be wealthier, so they won't be as affected by inflation and an economic downturn, should one occur this year.
Which is the better buy?
So, we have an iconic brand and industry giant in American Express versus a potential disruptor in Affirm. Potentially, BNPL firms could pose a threat to the traditional credit card networks and eat into their markets. But that probably won't be the case with American Express.
As American Express CEO Steve Squeri said on the fourth-quarter earnings call, BNPL typically caters to a different clientele than American Express, whose members tend to be more affluent. Many credit card companies and payment providers have also introduced their own versions of BNPL, including American Express's Pay It, Plan It flexible payment offering. This will make it a lot harder for Affirm to compete against these giants.
Bottom line: There's too much uncertainty surrounding BNPL in general, considering the competition, the lack of profit, and the fact that the federal Consumer Financial Protection Bureau is in the process of examining its risks.
On the other hand, American Express has a pretty good valuation, trading at about 18 times earnings, and should be in a good position to grow, given economic expectations. American Express looks like the better buy right now.