Buy now, pay later (BNPL) is a fresh twist on installment-based lending. These loans to consumers are typically small and repaid within a short time frame, and their popularity is soaring of late because they tend to be more user-friendly than alternative products like credit cards.
Affirm Holdings (AFRM 5.31%) is a global leader in the BNPL space, and it's catching a major boost thanks to two blockbuster deals it has signed in the last few years. The first deal is with platform e-commerce giant Shopify (SHOP 1.11%), and the second is with Amazon (AMZN 3.43%). Both deals will give Affirm prime real estate in their online stores.
Affirm just reported its full-year financial results for fiscal 2022 (ended June 30) and it's certainly facing some challenges, but the new Shopify deal has provided a big lift in one area in particular.
The Affirm difference
Credit cards are the main financing product buy now, pay later is trying to disrupt. There are some significant differences, including that credit cards are issued by banks, typically have a one-size-fits-all interest rate, and come with a range of different fees attached.
Affirm's technology integrates with the online stores of its merchant partners, and it appears as a payment option when a customer navigates to the checkout page. From there, the customer can finance their purchase in a few clicks with no card required. Affirm is committed to a transparent fee structure that includes an annualized interest rate of between 0% and 30%, and it discloses the all-inclusive price of the purchase up front so there are no surprises.
If the borrower is able to repay their loan in four installments in two-week intervals, they won't pay any interest or fees at all.
BNPL is one of the fastest-growing segments of the global $10 trillion payments market, and in the U.S. specifically, Affirm's partnerships allow it to cover 60% of all online commerce. The company does face competition from payments giant Block, which acquired former stand-alone BNPL leader Afterpay last year, and also multitrillion-dollar behemoth Apple, which introduced Apple Pay Later earlier in 2022.
Affirm's merchant base soared by 710%
One big advantage Affirm has is its deal with Shopify. That company is responsible for the online stores of 1.75 million merchants worldwide, so when it began to offer Affirm as its BNPL provider of choice under its Shop Pay Installments banner, Affirm immediately gained access to a flood of new customers and partners.
Thanks mainly to Shopify, Affirm ended fiscal 2022 with 235,000 merchants on board, which was a 710% jump compared to the 29,000 it had at the end of fiscal 2021. There's still a long runway for growth from here because that represents a mere fraction of Shopify's total merchant base.
Naturally, the number of customers signing up to finance their purchases with Affirm also soared. It topped 14 million most recently, which was nearly double the number it had a year ago, and customers purchased $15.5 billion worth of goods and services using Affirm for the full 2022 fiscal year. As a result, the company was able to grow its revenue by 54% year over year to $1.3 billion.
Affirm stock could be a long-term buy, but there are risks
A key issue plaguing the BNPL industry as a whole is its inability to generate profits. As competition continues to grow, companies like Affirm are having to spend more money to acquire (and keep) customers. Affirm spent $532 million on marketing in fiscal 2022 which was almost triple the $182 million it spent in fiscal 2021.
Additionally, rising interest rates have a twofold impact on lenders. First, they squeeze consumers' pocketbooks and can result in a spike in defaults, and second, they increase the cost of capital for lenders that draw on outside funding to make loans to customers. Affirm had a $255 million provision for credit losses in fiscal 2022 compared to $65 million last year, indicating that the first point is becoming an issue.
Overall, the company ended the year with a $707 million net loss.
But there is some good news for patient investors. Shopify aside, Amazon has generated $413.8 billion in e-commerce sales over the last four quarters, so with a partner like that in Affirm's corner the company has an opportunity to build a level of scale never achieved before in the BNPL space. It may have the best shot of any operator in the industry to turn profitable eventually.
Even if that milestone is some time away, Affirm is attracting customers and merchants so quickly that investors will have trouble ignoring its long-term potential. Its stock is down 86% from its all-time high, and while it's not something to bet the farm on right now, building a small position with the intention of holding for the next five to 10 years could pay off nicely.
