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Affirm’s stock has quintupled this year, beating all its tech rivals, with a buy-now-pay-later boom

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A year ago, there was little holiday cheer in Affirm. The point-of-sale lender was facing rising interest rates, recession fears and weakening consumer spending. Affirm shares ended 2022 down 90%, wiping out billions of dollars in market value.

Assertive investors are ending 2023 in a very different mood.

The stock is up 430% in 2023, as of Wednesday’s close, outperforming all other U.S. technology companies valued at $5 billion or more. The second best performer was Coinbasewhich soared 423%, largely thanks to the bitcoin rebound.

As the Federal Reserve sets the stage for interest rate cuts in the coming year and more retailers sign on to Affirm’s buy now and pay, or BNPL, offerings, the fear of a disaster scenario for the company has faded. Affirm shares rose sharply in November after the company signed an expanded partnership with Amazonand BNPL purchases hit an all-time high on Cyber ​​Monday.

“The expectation was that the consumer would be toast, unemployment would rise and higher interest rates would destroy everything, and the exact opposite has happened on every front,” Tom said Hayes, president of Great Hill Capital, who does not believe in the current situation. I have no position on the stock. “That’s why you have a scenario where Affirm can start to work.”

Created in 2012 by PayPal co-founder Max Levchin, Affirm competes with companies such as Klarna, The blocks Afterpay and Zip in the booming BNPL market. Shoppers who choose to pay with a BNPL service split their purchase into four or more installments, typically over a period of three months to a year, without accruing compound interest. Lenders make money through interest payments and by charging merchants fees for offering their loan services.

Retailers are taking advantage of this by giving consumers another option for purchasing a skateboard, watch, or gift for a family member, and one that may result in less sticker shock, leading to fewer abandoned carts .

Affirm momentum

Affirm made its public market debut on Nasdaq in January 2021, as the Covid-19 pandemic led to increased adoption of BNPL services. Shoppers who received stimulus checks used the small loans to buy clothing, electronics and Platoon exercise bikes, which at one point accounted for 30% of Affirm’s revenue. Online storefronts have rushed to add BNPL as an option during checkout.

But by early 2022, Affirm’s stock price had fallen more than 60% from its 2021 peak. The rest of the year was just as bleak, as soaring interest rates made it more expensive for Affirm to borrow money to fund installment loans. In February 2023, Affirm cut 19% of its workforce, and executives said macroeconomic challenges and “negative consumer sentiment” would likely persist for the rest of the fiscal year.

Affirm shares soar on deal

It turned out they were too pessimistic.

Shares of Affirm began rising in August after the company released its fourth-quarter financial results. The company has entered into new transactions with merchants in industries beyond retail, such as travel, wireless, ticketing and healthcare. The stock more than doubled in the fourth quarter, boosted by last week’s announcement that Affirm would offer BNPL loans to Walmartautomatic payment terminals.

Even with their dramatic rebound, Affirm shares are about 70% below their November 2021 high.

Looking ahead to 2024, BNPL lenders will face slowing inflation and an optimistic interest rate environment.

Dan Dolev, managing director of Mizuho Securities, said Affirm is in a good position to retain users. He highlighted new merchant offerings and the growing market for BNPL offerings in physical stores. Affirm says 16.9 million people have used its services and the company has more than 266,000 partner merchants.

Affirm is planning international expansion and has launched a debit card that allows customers to pay upfront or in installments. Affirm announced at its investor day last month that it plans to introduce a spending account linked to its debit card that will allow ATM access and direct deposit capability.

“The next year or two will be something very different,” said Dolev, who has a buy rating on Affirm shares. “Now they have the brand, and what are they going to do with it? They’re going to turn it into a full-fledged financial services company.”

“David versus Goliath”

Hayes sees other reasons to be skeptical. He said Affirm faced an “uphill battle” competing with established carriers such as PayPal and Block, as well as credit card companies such as American Express, Citi And Hunting who have launched into installment loans.

“It’s David versus Goliath, and Goliath is going to win,” Hayes said.

Hayes said Affirm is following a similar path as the online lender SoFiby trying “to have a thousand different projects, and to say that we are as big as J.P. Morganbut in the end, it just won’t work. »

BNPL lenders also face an increased risk of users failing to make payments on time. A March report from the Consumer Financial Protection Bureau found that BNPL users were on average more likely to have higher levels of credit card debt. BNPL borrowers also tend to have lower credit scores, the CFPB said, with an average score in the subprime range of 580 to 669.

The Affirm website home screen is displayed on a laptop in an arranged photograph taken in Little Falls, New Jersey on December 9, 2020.

Gabby Jones | Bloomberg | Getty Images

An Affirm spokesperson did not comment for this story, but pointed to previous comments from company executives.

“As our network grows, our moats deepen,” Levchin said at the company’s investor forum in November. “We’re getting more data. We’re underwriting more deals. We’re meeting more people.”

Affirm’s flaws remain low by industry standards. Average delinquency rates for peers, such as Loan ClubSoFi, Reached And OneMain Financialrose from 5.7% to 6.3% between January and November, while Affirm’s delinquency rate rose from 2.8% to 2.6%, Jefferies analysts wrote in a report last month. last.

Affirm says it bases lending decisions on a variety of data points in addition to a user’s credit score.

“Our process involves reviewing credit report data, but could also involve things specific to Affirm, like what we know about the merchant and what they are about to sell you,” Levchin said in a press release last year.

As BNPL adoption grows, regulators are closely monitoring the space. Last week, three U.S. senators wrote a letter to the CFPB urging the agency to monitor the surge in BNPL use during the holidays, saying it could leave consumers overcharged. The CFPB announced in September 2022 that it would subject BNPL to stricter oversight, similar to credit card companies.

Wells Fargo released a report earlier this month describing BNPL loans as “phantom debt” that could lull “consumers into a false security in which many small payments add up to one big problem”. As it stands, the industry “is not yet a major problem for consumer spending,” wrote Wells Fargo economists Tim Quinlan and Shannon Seery Grein.

Because BNPL loans are not currently reported to major credit reporting agencies, they write, there is “no way of knowing when this phantom debt could create substantial problems for the consumer and the economy as a whole.

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