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Affirm Holdings Inc Cl A(AFRM-Q)
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Is Affirm Holdings Stock a Buy?

Motley Fool - Sat Oct 28, 2023

Affirm(NASDAQ: AFRM) got off to a rocky start after its initial public offering (IPO) a couple of years ago. However, 2023 has been a much better year for shareholders, with the stock gaining more than 75% since January. The buy now, pay later (BNPL) company continues to benefit from consumer preferences for its services along with a recent partnership with Amazon. Here's what you should know before buying the stock.

Buy now, pay later's growing popularity

Affirm allows consumers to split payment for a purchase into installments. BNPL has become popular in recent years, as customers prefer the straightforward approval process and ease of use. According to the Consumer Financial Protection Bureau, the number of BNPL loans originated in the U.S. from the top five companies grew 970% from 2019 to 2021.

Affirm's growth over the years has been a bit of a mixed bag. From 2020 to its most recent 2023 earnings (for the fiscal year ended June 30), Affirm's net revenue grew 212% to $1.6 billion. However, net losses for the company continue to mount. In 2020, the BNPL company had a net loss of $126 million. This year, its net loss was $985 million.

Affirm's recent partnership with Amazon

Shifting consumer preferences toward BNPL solutions has been as a tailwind for Affirm's growth. More recently, the company partnered with online retail giant Amazon to become the first BNPL payment option through its Amazon Pay payment option.

This partnership is one component of Affirm's solid fourth-quarter earnings results. In the quarter, its gross merchandise volume rose 25% to $5.5 billion, while revenue jumped 22% to $446 million. While these figures beat analysts' expectations, the company's rosy outlook for its first-quarter revenue (ended September 30) had investors optimistic about its continued growth. According to Adobe Analytics, Amazon Prime Day shoppers chose BNPL options at a rate that was 20% higher than last year's, which should benefit the company's current quarterly earnings.

A subscription service may be on the way

In addition to its Amazon Pay partnership, Affirm is exploring the possibility of a monthly subscription service. According to a Bloomberg report, the proposed service would cost $7.99 per month and would offer upgrades for its users and savings account holders. The service, called Affirm Plus, would guarantee a rate of 0% on installment loans up to $2,500 and would pay savings account holders higher interest rates. The subscription services could encourage more repeat usage by customers while generating recurring revenue for the fintech.

A person with a phone and laptop makes a payment in an outdoor cafe setting.

Image source: Getty Images.

Consumer spending slowdown could hurt Affirm

Robust consumer spending has surprised many experts, many of whom predicted a recession would come this year. Some of that strong spending has come on the back of increasing consumer debts. According to the New York Federal Reserve Bank, credit card debt topped $1 trillion for the first time ever after rising 5% in the second quarter. Additionally, the delinquency rate on credit card debt is up to 2.77% and is now above pre-pandemic levels.

An economic slowdown could result in less spending, and higher default rates in the future could hurt Affirm and other consumer finance companies. In response, Affirm has tightened its lending standards, which appears to be working thus far. Its 30-plus-day delinquency rate has gradually fallen from 2.7% of loans outstanding in the first quarter of its fiscal year to 2.1% in the fourth quarter. Investors will want to keep a close eye on these trends when Affirm announces first-quarter earnings in early November.

Is Affirm the right stock for you?

Affirm's revenue and volume growth are undeniable as it rides the wave of shifting consumer preference for BNPL. The business is growing, making progress through its Amazon partnership, and its potential subscription product could also be a source of steady cash flow as well.

For more aggressive investors willing to withstand near-term volatility, Affirm presents an intriguing opportunity. Priced at 3.2 times sales, it is trading near its lowest valuation since going public. The company should also benefit from tailwinds from a growing BNPL market, which eMarketer projects could double from $72 billion this year to $125 billion by 2027.

However, the company will face headwinds from a potentially slowing economy, which could put pressure on its impressive growth rate. It also continues to lose money fast, and is facing increased competition from Apple, PayPal, and others. For that reason, conservative investors looking for steady returns should avoid the stock for now.

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