It wasn’t long ago that Affirm ( AFRM ) traded in the triple digits. Today, the stock has been battered and bruised along with most other growth stocks. Last summer, as delinquency rates were rising and fears of a recession loomed, many were calling for the end of the BNPL (buy now, pay later) business model. As a result, the valuations of many BNPL companies were slashed by more than half. However, Affirm’s fundamentals remain strong in a BNPL market that’s still poised for growth.
Unlike its BNPL competitors and other e-commerce operators, Affirm has continued to grow despite the tough macroeconomic environment. Its GMV (Gross Merchandise Volume) saw 62% growth in the last quarter, active customers grew 69%, and revenue overall 34%, to $362M. The company’s growth has had three main drivers.
First, Affirm benefits heavily from its market leadership, where it is the most used BNPL app in the U.S. It captures over 60% of U.S. retail e-commerce sales and is partnered with major retailers like Amazon ( AMZN ) and Walmart ( WMT ). These, and other partnerships across a wide range of consumer categories, have made it more resilient to decreases in any one area of consumer spending.
Second, competitors like Klarna () have seen growth decrease as a result of expense-cutting amid the tough macro conditions. In contrast, Affirm has been able to maintain its investments in growth, since its financials are much stronger than its competitors. In fact, it has been close to breaking even on a non-GAAP basis.
The BNPL Market
Though market sentiment has been quite negative on BNPL due to the macro environment, its potential for growth is still unparalleled. Analysts project the BNPL market to be valued at $3.68 trillion by 2030, growing at a 45% CAGR. In addition, researchers at Insider Intelligence predict that payment volume growth will compensate for any decrease in user growth — because consumers no longer use BNPL solely for expensive one-off purchases, but also for daily purchases like grocery shopping.
Amid the current inflationary environment, consumers are making up the difference through borrowing. With U.S. credit card debt is at a record high, and debt itself getting more expensive (as rates climb), BNPL companies are in position to benefit as consumers look for alternatives that have low or no interest. (Meanwhile, Affirm’s own rates are protected, for the time being, by fix-rate arrangements.)
Valuation
With 21 analyst ratings, the average price target is $19.32, which is over 13.6% above current share prices. (Only three rate it as a “sell.”) AFRM also enjoys a 3.52x price/sales ratio — an historic low for the stock and much lower than the industry average of 5.57x.
Risks
Affirm’s biggest risk lies in its partnerships with large retailers as they are a significant revenue driver. Its status as the sole provider of BNPL on Amazon will expire at the end of January 2023. Walmart, one of the largest retailers, is also developing its own version of BNPL. The BNPL market is still young, and new entrants have the power to disrupt Affirm’s market leadership as existing retailers have more options to choose from.
Wrap
Though the sentiment has been negative around Affirm, industry tailwinds combined with the company’s operating track record could soon lead to a turnaround. In times of widespread recession caution among investors, good companies are often overlooked. Affirm is one of them.
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