The stock market is having a rough start to 2022. The technology-centric Nasdaq 100 index is down 14% year to date at Monday's prices, and we're not even four weeks into January. But some individual stocks have suffered far worse, losing 50% of their value (or more) and falling deep into bear-market territory.
Buy now, pay later (BNPL) company Affirm Holdings (NASDAQ:AFRM) is one of those stocks, declining 70% from its all-time high closing price of $168.52 set on Nov. 4, 2021. But the pessimism might have gone too far since Affirm's new deals with Amazon and Shopify could deliver growth in its business of over 6,000%. Here's how.
Image source: Getty Images.
The consumer credit revolution
The consumer finance space is constantly evolving, with new and innovative companies rushing to capture young borrowers with shifting spending habits and an appetite for technology-enabled services.
Large banks have always dominated consumer credit, but their one-size-fits-all approach to products like credit cards is under siege from emerging installment-based lenders like Affirm, which uses a buy now, pay later (BNPL) model. Overall, these tend to be more flexible on both the interest rate and the loan term. Affirm offers repayment periods of three months to 36 months and an interest rate of 0% to 30% per annum depending on the borrower's creditworthiness.
Affirm's BNPL loans also function differently than a typical credit card. The company targets businesses that place Affirm as a payment option at the checkout of their online stores, allowing the purchaser to finance their shopping cart in real-time -- no card required! For the merchant, having a finance option at the checkout means the customer is incentivized to spend more money, and in turn, the business is more likely to steer its customers to Affirm because of that boost in sales. It's a win-win arrangement.
Affirm is winning big
For several years, Affirm's market valuation lagged behind global BNPL leader Afterpay, which had first-mover advantage and, therefore, a stronger brand. That company was recently acquired by Block (formerly Square) in an all-stock deal, which seemed to leave Affirm even further in the dust.
But all of that changed in November when Affirm revealed an expansive deal with global e-commerce giant Amazon, which gives Affirm's BNPL payment option prime real estate in Amazon's online checkout. This deal adds another growth driver to complement Affirm's existing deal with Shopify, which recently began a much broader rollout. Shopify's 1.75 million merchants now have the option to implement BNPL into their online store checkouts.
Here's why those two deals have now pushed Affirm's valuation past Afterpay's.
Company | Total Customers | Gross Merchandise Volume (TTM) |
|---|---|---|
Affirm | 8.7 million | $9.6 billion |
Shopify | 118 million | $162.4 billion |
Amazon | 200 million | $458.0 billion |
Data source: Affirm, Shopify, Amazon. TTM = Trailing Twelve Months.
Since Shopify and Amazon have a combined 318 million registered shoppers, that represents an opportunity for Affirm to grow its user base by 3,555%. From a gross merchandise volume perspective, Affirm is about to have exposure to a whopping 6,362% more sales.
The effects of the Shopify deal are already kicking into high gear, with the total number of merchants integrating Affirm's BNPL payment option growing 1,469% from 6,500 to 102,000 in the recent fiscal 2022 first quarter.
Why you should buy the stock
Naturally, the major deals should translate to significant revenue growth for Affirm, and that's exactly what analysts are expecting.
Metric | Fiscal 2021 | Fiscal 2022 (Estimate) | Fiscal 2023 (Estimate) | CAGR |
|---|---|---|---|---|
Revenue | $870 million | $1.27 billion | $1.87 billion | 46% |
Data source: Affirm, Yahoo! Finance. CAGR = Compound Annual Growth Rate.
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Looking at the competitive landscape, now that Block has acquired Afterpay, it's likely those two companies focus on integrations between Afterpay's BNPL service and Block's Cash App consumer finance ecosystem. Therefore, Affirm's largest competitor may no longer be focused solely on attracting new customers, leaving a gaping hole in the market and an opportunity for Affirm to fill it.
There are some short-term headwinds to navigate with the broader technology stock sell-off, but investors with a long-term focus could do extremely well by taking advantage of the recent dip in Affirm's share price.
