It's been a mixed bag for consumer lenders this earnings season. Over the last month, companies including Upstart Holdings, LendingClub, and LendingTree have taken a stock price hit following their earnings reports.
Affirm (AFRM 5.31%) is the most recent consumer lender to report, and it bucked the trend when it reported fourth-quarter and full-year earnings late last month for the period ending June 30. The company beat analysts' expectations and guided for growth in Q1 of fiscal year 2024 above analysts' estimates. The stock price shot up 59% in the days following its report.
Investors who held the stock over the past few years have experienced a turbulent ride. Here's what you should know about Affirm to see if it's right for your portfolio.
Buy now, pay later's rapid growth
Affirm is a buy now, pay later (BNPL) company that enables customers to split up their purchases of select goods and services into a series of payments. BNPL companies can offer interest-free payments during a specific period as part of this arrangement but charge interest if customers don't pay within that period. One of the most common repayment periods for BNPL is "pay in four" (four installments, paid in two-week intervals).
BNPL has grown in popularity in recent years. Customers prefer these payment options because they can be easier and cheaper than credit cards, and the approval process is more straightforward. As a result, BNPL has experienced explosive growth.
Last year, the Consumer Financial Protection Bureau surveyed five of the largest firms offering BNPL loans: Affirm, Afterpay (acquired by Block for $29 billion in 2022), PayPal, Klarna, and Zip. It found that the number of BNPL loans originated in the U.S. by those firms grew 970% from 2019 to 2021.
Affirm posted solid growth and raised guidance
Affirm has enjoyed tailwinds from the growth of BNPL, and earlier this year, it partnered with Amazon Pay to become the first BNPL company included as part of this payment option through the retail giant. This partnership was one component that helped it post solid earnings in its most recent quarter, ending June 30. In the quarter, the company posted net revenue of $446 billion, up 22% year over year, and gross merchandise volume of $5.5 billion, up 25% from last year.
Both of these figures were above analysts' expectations, but it was the rosy guidance that had investors feeling especially good. For Affirm's current first quarter (ending Sept. 30), the BNPL company projected revenue to come in between $430 million and $455 million, a notch above analysts' estimates of $429.9 million.
Investors must be aware of headwinds that could affect all BNPL companies
Investors must remember that there is uncertainty in the economy, and consumer debt continues to rise. According to the New York Federal Reserve Bank, credit card debt rose 5% year over year in the second quarter and surpassed $1 trillion for the first time. Delinquency rates on credit cards have also ticked up to 7.2%, slightly above pre-pandemic levels.
Affirm could feel a pinch if the economy were to slow down, as it could result in less spending and higher defaults. Facing this uncertainty, all BNPL companies have tightened lending standards to ensure they hold quality loans.
These tighter lending standards seem to be working so far for Affirm. In the first quarter of last year (ended Sept. 30, 2022), its 30-day-plus delinquency rates peaked at 2.7%. This rate has gradually fallen and came in at 2.1% in its most recent quarter.
Data source: Affirm. Chart by author.
Affirm stock is near its cheapest valuation since going public
Another thing investors must consider is that Affirm continues to lose money. Its fourth-quarter net loss was $206 million, up from $186 million last year. It lost over $985 million during its fiscal year, up from $707 million in the year prior, and still has work to do to improve its bottom line.
However, growth remains solid. According to Adobe Analytics, shoppers used BNPL on Amazon Prime Day at a rate that was 20% higher than last year, which should benefit the company's current quarterly earnings. Not only that, but it should enjoy tailwinds from a growing BNPL market, which eMarketer projects could nearly double from $72 billion this year to $125 billion by 2027.
AFRM PS ratio data by YCharts. PS = price to sales.
Affirm is expanding quickly and has surprised investors with its positive quarter and guidance. Even after the stock's recent run-up, it trades at 4 times sales, near its lowest valuation since going public.
It continues to lose money, making the stock vulnerable to volatility -- especially if growth slows down or delinquencies tick up. But given its partnership with Amazon and the future growth of the BNPL industry, Affirm could be a solid buy for long-term investors who understand these risks and are willing to hold through this potential volatility.
