Affirm Holdings' (AFRM 5.31%) share price has shot higher by about 170% since the start of the year. The buy now, pay later (BNPL) company's business is crushing it right now, thanks largely to key partnerships with some of the biggest e-commerce platforms in the world.
The company has posted solid results that beat analysts' expectations in back-to-back quarters, and management's rosy forecast has investors piling into the stock. Can the good times keep rolling for this fintech?
The explosion in buy now, pay later services
Affirm provides BNPL services -- short-term financing arrangements that allow consumers to split their payments for a purchase into several installments. BNPL usage has grown in popularity in recent years as consumers like its ease of use, simple approval process, and simple payment options -- particularly now that interest rates are higher.
BNPL options have soared in popularity over recent years, boosted by the rise in online shopping and younger shoppers' preference for its ease of use. According to Juniper Research, 360 million people globally use BNPL services. Gen Z is the most active demographic in the market, with 37% using such services in 2021.
Its staggering growth has come at a significant cost
Affirm has benefited from these shifting consumer trends. Over the three-year period ended in June 2023, Affirm went from 3.6 million active consumers to more than 16.4 million, and its revenue grew by 212%. The company has done an excellent job of expanding its customer base, but that has come at a significant cost to the bottom line. In its fiscal 2023 (which ended June 30), Affirm posted a net loss of $985 million as its sales and marketing expenses ballooned.
Data source: YCharts.
Affirm's recent earnings have surprised to the upside
The BNPL company has surprised analysts with its results in the past two quarters, beating the average estimate on both the top and bottom lines. In its fiscal 2024 first quarter ended Sept. 30, Affirm brought in $497 million in revenue, well above the $455 million that was the high end of its projected range a few months ago.
One driver of the company's solid report was its partnership with e-commerce platforms Amazon and Shopify. Earlier this year, Affirm partnered with Amazon Pay to become the first BNPL provider to provide payment options through the retail giant. It has since expanded that partnership to Amazon's business-to-business store. In addition, gross merchandise volume (GMV) through Shop Pay Installments, powered by Affirm, grew for the third consecutive quarter.
GMV and active consumers increased by 28% and 15%, respectively, continuing their steady trends higher.
Chart by author.
The opportunity in buy now, pay later is huge
Affirm projects that its fiscal Q2 (ending Dec. 31) revenue will come in between $495 million and $520 million. It also expects another solid quarter of GMV growth to between $6.7 billion and $6.9 billion as the holiday shopping season ramps up.
The future looks bright for the BNPL industry. According to a report published by Straits Research, the total market size of BNPL is expected to go from $257 billion in 2022 to $3.9 trillion in 2031 -- a compound annual growth rate of more than 30%. With such a huge opportunity, Affirm is well positioned, but it faces powerful competition from PayPal, AfterPay (owned by Block), Klarna, and Apple Pay.
Is Affirm a good stock buy for you?
Affirm has made huge strides in terms of taking market share thanks to its partnerships with Amazon and Shopify. However, the company could face near-term headwinds from a potential economic slowdown. Banks are seeing signs of consumer stress in the form of delinquencies and past-due accounts, and credit card debt topped $1 trillion for the first time earlier this year.
The company is also struggling with profitability. It reported a net loss of $172 million in its most recently quarter, though that was an improvement from its $251 million loss in the prior-year period. I'd like to see it make more progress on that front before I invest in the company. Growth-focused investors looking to cash in on the BNPL trends may find the stock intriguing, but should be mindful of the stiff competition it faces and the possibility that macroeconomic headwinds could hinder its path to profitability. Conservative investors seeking steady returns would be better off looking elsewhere for now.
