Buy now, pay later was a sensation in 2021 as a potential alternative to credit cards. Investors flocked to companies like Affirm (AFRM -1.56%), and share prices soared as high as $168 -- massive investment returns in a matter of months.
Today, Affirm is a tale of a stock bubble that burst. Share prices have declined 93% from their peak, and many shareholders are left wondering what the future holds for the company.
Fortunately, Affirm's tale hasn't concluded. Instead, it's just beginning. Here is why the future still seems bright, though it may require patience to reap the rewards.
Buy now, pay later is still alive and well
It's important to differentiate between credit cards and buy now, pay later (BNPL). A credit card is essentially a line of credit, tallying up every purchase as a lump sum. BNPL works at the transaction level, treating each purchase like an individual loan. The critical difference is that unlike a credit card, where every purchase accumulates interest once you begin carrying a balance, BNPL can offer different terms for each purchase, sometimes interest-free.
BNPL companies like Affirm can collect a lot of consumer data because they work at the transaction level and use it to help merchants sell more at better prices. A merchant might not need to discount something by 15% to make a sale if the customer can opt to pay in four installments instead. That incentive draws merchants to work with BNPL companies.
The bear market and implosion of many fintech stocks in 2022 might have given the impression that BNPL was a flash in the pan, but that doesn't seem accurate. According to Research and Markets, global BNPL spending is forecast to grow 21.7% and hit $527 billion in 2023. That's a lot of payment volume up for grabs.
Affirm is positioned well for a competitive fight
Like any significant market opportunity, BNPL is flooded with competition. You'll find dedicated players like Affirm, plus larger technology companies like PayPal and Apple pushing into the market with their offerings. How does someone know who the winners will be? It's a fair question.
Affirm seems positioned well due to several vital partnerships the company has built over the past several years. It works with 90 merchants doing at least $1 million in payment volume, including Amazon, Shopify, Walmart, Target, and Wayfair. These partnerships helped Affirm grow its active members to 15.6 million as of Dec. 31.
Investors will need to monitor user growth moving forward as companies fight for customers in this growing industry. Affirm's partnerships arguably give it competitive distribution (people won't use your product if it's not in front of them), something Apple and PayPal can leverage with their existing user bases. Affirm's member count grew 39% year over year in the quarter ending Dec. 31, so keep an eye on which companies can continue growing and which are losing the fight.
Is profitability within sight?
One criticism of BNPL is the idea that consumers won't pay their bills when times get tough. Affirm saw some of that, as delinquencies are up as we get further away from the pandemic-related stimulus programs. While delinquency rates are above 2020 and 2021 levels, they are tracking on par with 2019 trends. In other words, consumers are acting as they did before COVID-19, so I don't think there's a ton to worry about unless this changes.
Management says it has a goal to generate positive non-GAAP operating income by the end of fiscal 2023 (June 30). This isn't true profitability, but it's a step in the right direction and could show the market that the business is sustainable over the long term. Operating losses through the first two quarters of Affirm's 2023 fiscal year were $647 million, but look for that to shrink over the next two quarters. There is roughly $2.3 billion in unrestricted cash and marketable securities on the balance sheet, plenty to fund operations for a while yet.
AFRM PS Ratio data by YCharts
At a market cap of just $3.2 billion, more than half of Affirm's value is in the cash it has. It's trading at a price-to-sales ratio of just 2, from what was as high as 45 in 2021. Yes, Affirm has work to do to show it can survive and turn a profit, but there's a lot more upside than downside from here if you believe in the business.
