Valuations for fintech companies have gotten hit hard this year amid high levels of inflation, rapidly rising interest rates, and investors shying away from risks associated with growth stocks. Buy now, pay later upstart Affirm Holdings (AFRM -2.37%) and payments giant PayPal Holdings (PYPL 0.45%) have each been feeling the squeeze, and their share prices have fallen 86% and 70%, respectively, from lifetime highs.
Which of these beaten-down fintech stocks is the better buy at today's prices? Read on to see why one of these companies is probably a better fit for most investors.
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Affirm could bounce back from massive sell-offs
Despite the huge drawdown for its stock price, Affirm has continued to expand its business at an encouraging clip. The company's 2022 fiscal year, which ended June 30, saw continued momentum on the merchant and customer growth fronts, and big share price declines could give way to a major valuation recovery if the business can weather a less favorable economic backdrop.
Affirm still increased sales at a rapid clip in fiscal 2022, with 39% sales growth in the fourth quarter bringing full-year sales growth to 55% and annual revenue to roughly $1.35 billion. Spurred by increased adoption from sellers on Shopify and other partnership initiatives, the buy now, pay later specialist ended the year with 235,000 merchant partners -- an impressive increase from the 29,000 active merchants it had at the end of fiscal 2021.
Meanwhile, the company's active customer count increased 96% to reach 14 million. However, Affirm is still taking on losses to power that growth, with its net loss last fiscal year expanding to $707.4 million from $441 million in fiscal 2021. Management is guiding for sales to come in between $1.625 billion and $1.725 billion in the current fiscal year, which would be annual growth of roughly 24% at the midpoint of the target. That wouldn't be a terrible expansion rate, but the deceleration does look more concerning in light of the company's high net losses and economic risk factors on the horizon.
Affirm's business model could come under pressure in the event of a prolonged recession. If people who have purchased goods using the company's installment plans lose jobs or otherwise see their financial conditions worsen substantially, there's a risk the business will see higher levels of defaults. Affirm's service is geared toward customers with high FICO scores, which should help shield the business from surging defaults, but the stock still looks like a high-risk, high-reward play in today's uncertain economic climate.
PayPal is attractively valued and still has big upside
While PayPal still falls into the growth-stock category, it's currently trading at value prices for long-term investors. Shares are priced at roughly 23 times this year's expected earnings and 3.8 times expected sales, and these levels suggest the potential for impressive returns given the strength of the underlying business and potential for margin expansion.
PYPL PE Ratio (Forward) data by YCharts
Despite challenges related to the macroeconomic backdrop, PayPal still expects to grow revenue by roughly 11% this year and post more than $5 billion in free cash flow. While the company's midpoint guidance calls for non-GAAP (adjusted) earnings to fall roughly 15% this year to $3.92 per share, PayPal is carrying out cost-saving initiatives that should boost earnings in 2023. Management expects moves taken to better leverage scale as the company emerges from the pandemic will result in cost savings of $1.3 billion next year.
In addition to the potential for solid sales growth and margin expansion, PayPal is also on track to conduct a $15 billion stock buyback that should also help increase earnings per share and get the company back on track for earnings growth. The digital-payments industry still looks poised for big growth over the long term and PayPal's leading position in the category puts it in a good position to capitalize on this momentum and deliver strong returns for shareholders who take a buy-and-hold approach.
So, which stock is the better buy?
For most investors, PayPal probably offers a more appealing risk-reward profile. The stock trades at significantly less growth-dependent levels compared to Affirm's, it's backed by a sturdy and well-established business, and it still has substantial room for long-term upside. Investors who are willing to take on more risk in pursuit of more explosive returns may find that Affirm is a better fit for their portfolio goals, but overall, I believe PayPal looks like the better buy at current prices.
