U.S. consumers have shown surprising resilience this year, which was on full display this Black Friday. According to data from Adobe Analytics, sales during the holiday shopping week increased 7.5% compared to 2022.
Sales exceeded expectations thanks, in part, to deep discounts on numerous products and the increased use of flexible payment options, such as buy now, pay later (BNPL). According to Adobe, orders using BNPL for the Thanksgiving week were up 72% compared to last year, resulting in a $79 million increase in revenue for those providers.
One company that benefits from the increased usage of BNPL is Affirm (AFRM 5.31%). Affirm stock has surged higher this year thanks to its partnerships with major e-commerce providers. The recent uptick in BNPL usage during the holiday shopping season is another positive sign for the company, whose stock has surged 44% since the post-holiday shopping day.
Despite the surge, I'm not yet sold on Affirm stock. Here's why.
Consumers are increasingly turning toward credit cards and other payment solutions
Coming into this year, there was a lot of talk about a recession on the horizon. After all, the Federal Reserve raised interest rates aggressively to bring down elevated inflation. Instead, what we saw was an impressive display of resilience among consumers. Despite interest rates reaching levels not seen in two decades, people continued to spend down savings and use credit cards and other flexible payment options at a rapid rate.
One contributor to the rising debt usage is that people have spent down excess savings accumulated during the pandemic. Earlier this year, consumer credit card debt surpassed $1 trillion for the first time, and consumer credit card debt is up $91 billion, or nearly 10% from last year. This usage comes when average credit card rates are a record-high 22%.
As a result, alternative payment options like BNPL have surged. BNPL is a popular option among consumers because it allows them to finance purchases quickly and easily, thanks to the fast approval process. People can then split up their purchases into a series of payments made over a few weeks or months.
Affirm has achieved impressive growth thanks to key partnerships
The rapid growth of BNPL benefited Affirm, which forged partnerships with some of the largest e-commerce companies in the world. This year, Affirm partnered with Amazon Pay to become the first BNPL provider to offer payment options through the e-commerce giant. It has since expanded its partnership to include Amazon's business-to-business store as well.
It also benefits from a partnership with Shopify, offering Shop Pay installment options for customers. Shopify chose Affirm as a partner a couple of years ago because of its speed at converting customers and its ability to provide a scalable payment solution that can grow as Shopify grows.
Affirm's partnerships with the two major e-commerce providers have done wonders for its growth. In its most recent quarterly earnings report, Affirm saw its gross merchandise volume and active customers increase by 28% and 15%, respectively, from last year.
Chart by author.
Investors will want to keep a close eye on consumer credit metrics
Investors should approach Affirm with caution before diving in and buying the stock. For one, people are increasingly using credit options to pay for bills. This is coming amid persistent inflation, which, while it has come down, remains above the Federal Reserve's longer-term target of 2%. As a result, interest rates on credit cards are the highest they have ever been.
Investors will want to watch consumer credit trends and how credit performs over the coming quarters. Delinquency rates on credit cards have risen from 2.3% last year to nearly 3% at the end of the third quarter. The uptick shows that people may be feeling the squeeze from higher credit balances and high interest rates.
One criticism Affirm has faced is its credit quality, which saw an uptick in delinquencies over the last year. The company improved on this by tightening its lending standards and saw delinquencies decline. However, delinquencies in the first quarter (ending Sept. 30) did tick higher for the first time in the last year.
Chart by author.
Affirm faces stringent competition and has work to do to improve its profitability
Affirm benefits from its strategic partnerships with Amazon and Shopify and has achieved solid growth. However, it still has work to do to improve its bottom line. Despite its impressive growth, the BNPL company reported $906 million in losses over the past 12 months.
It also faces stiff competition. According to a consumer survey by LendingTree, PayPal is the most popular BNPL provider, with 55% of users saying they have used it. Klarna (33%) and Afterpay (owned by Block) (29%) are the next most popular services, followed by Affirm (28%). Competitors will continue to jockey for market share in an industry that could grow 30% annually by 2031, according to a report published by Straits Research.
It's a great sign that Affirm is forging partnerships with major e-commerce companies and adding customers. However, it continues to lose money in a highly competitive industry and has work to do to improve the bottom line. The company is intriguing and has earned its way onto my watchlist. However, given the 312% run-up in the stock price this year and the big question mark around consumer health, I'll be avoiding the stock for now.
