Is Affirm Holdings Stock a buy it now?

fintech Affirm Assets (AFRM 5.68%) certainly has plenty of traits that should make it a great investment. Buy Now, Pay Later (BNPL) is a new flexible credit product that is gaining popularity among consumers and merchants. Affirm Founder and CEO Max Levchin is also one of the founders of the company that eventually became PayPal, so he has seasoned leadership in the lending technology industry. And it’s a small, fast-growing upstart. With an enterprise value of just over $7 billion at the time of this writing, Affirm could one day be a major player in the financial services space.

But after only a year and a half as a publicly traded company, shares of Affirm have seen a steep decline. Shares are down 87% from all-time highs reached in late 2021. Admittedly, Affirm was way too expensive at BNPL’s peak last year. But after its big drop, is Affirm stock a buy now?

Is the BNPL hype completely deflated?

BNPL was a hot commodity, and an even hotter investment trend, just a year ago. Featuring an app-based marketplace that shoppers can browse, BNPL apps provide easy-to-obtain credit designed to offer consumers flexible payments for larger purchases. It combines elements of traditional merchant lending practices with e-commerce and digital payments technology.

Tens of millions of consumers and merchants around the world are using a BNPL offering these days, and despite macroeconomic issues like inflation weighing on consumers, BNPL usage continues to grow. Some estimates assume that BNPL’s global revenues could grow by an average of 26% per year until the end of this decade. With that kind of hype, it’s no wonder some investors blindly piled into stocks like Affirm last year.

Data by YCharts.

Affirm has several ways to earn money: earning fees for facilitating a sale for a merchant, earning interest on consumer loans, earning fees when money is transferred over a digital payment network, and providing lending services to third party investors. . It is a transactional activity that ultimately relies on consumers increasingly using BNPL and other credits over time.

So far, so good for Affirm. First-quarter 2022 revenue increased 54% year-over-year to $355 million. And although it has an exclusive deal with the e-commerce software giant Shopify offering flexible payment options for the company’s Shop Pay product, Affirm is always free to enter into other commercial agreements for its payment application. For instance, AmazonThe 2022 Prime Day purchase event featured a deal where Affirm users would earn a $25 credit if they spent $100 on Prime Day and funded the purchase with Affirm. Suffice it to say, Affirm likely attracted new users and funded many retail therapy treatments in July.

Transactional businesses can still grow quickly, but come with unique risks

Affirm and other BNPL apps (To block‘s Afterpay, Pay-In-Four from PayPal, Klarna, a new offer from Apple, etc.) are facing strong competition, and this is not expected to change. There aren’t particularly high barriers to entry, given that digital payments and e-commerce software technology are quite common these days. In fact, companies like Marqueta offer a software-based “credit card” as an API, allowing a developer to deposit financial credit into an application with a few simple clicks.

And for a company like Affirm, there are additional risks as well. A service that relies on consumer spending is transactional and will be cyclical depending on the health of retail spending. Although a fast-growing company, it currently trades less than five times its 12-month turnover. Affirm is not yet generating consistent free cash flow and is still running strong unadjusted net losses. Given its transactional nature, this stock deserves to trade at a lower price-to-sales ratio than a fast-growing software company that relies on persistent, recurring subscription sales.

But could it one day be very profitable? Sure it could. PayPal, a leader in app-based digital payments, generates free cash flow profit margins of 20% in a good year. And in its pursuit of greater scale, Affirm had $2.26 billion in unrestricted cash and short-term investments on its balance sheet at the end of March 2022, offset by total debt of $4.01 billion. . It’s not the cleanest balance sheet, but the company has ample cash to fund its expansion efforts.

Is Affirm stock a buy? Only if you are interested in a high risk and potentially very rewarding investment. Here are some factors to consider:

  • Just because the valuation is “cheap” given the long-term potential doesn’t mean the stock price can’t go down. If you buy now, expect a lot of volatility.
  • BNPL is highly competitive, and there could be merger and acquisition activity that would affect Affirm’s valuation and resulting investment returns.
  • Given these risks, keep any investment in Affirm a small overall percentage of your portfolio – if you decide to invest at all.

Affirm is a potentially promising stock in the world of fintech, but there are a number of issues that could prevent it from being a worthwhile buy at this point. If you do decide to buy, consider making it part of a well-diversified portfolio of other financial services companies and stocks of companies in other industries as well.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Nicholas Rossolillo and his clients hold positions at Apple, Block, Inc., PayPal Holdings and Shopify. The Motley Fool holds positions and recommends Affirm Holdings, Inc., Amazon, Apple, Block, Inc., PayPal Holdings, and Shopify. The Motley Fool recommends Marqeta, Inc. and recommends the following options: $1140 long calls in January 2023 on Shopify, $120 long calls in March 2023 on Apple, $1160 short calls in January 2023 on Shopify and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.

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