Shop Stock: Affirm Is Hoping to Put an End to Late Fees and High-Interest Credit Cards
The next few months should be boom times for retailers as stimulus checks pump up the economy. But consumers aren’t shopping the way they used to. They are souring on credit, and they are increasingly likely to shop online with a digital wallet rather than pull out cash in a store.
The new take on installment plans offers a way to make a purchase and shell out cash in the future. That’s no different than a credit card, of course. But BNPL is more flexible. Buy something online with BNPL and you can pay for it in a few weekly or monthly installments, typically interest free.
(WMT) are now participating, aiming to boost sales with the flexible payment plans. And in today’s low interest-rate climate, most BNPL services offer zero-percent interest for up to a year. Affirm doesn’t charge late fees.
“There’s demand for something that works like a credit card but is easier to understand and more transparent,” says Max Levchin, CEO of Affirm.
Levchin, one of the founders of
(PYPL), launched Affirm in 2012. The company has a growing network of retailers, including
(CSPR), Walmart, and
(PTON). Affirm went public in January at $49 a share and has a market value of $18.4 billion.
The stock looks compelling as a long-term bet on BNPL. At about $70, shares are down more than 50% from their February peak of $147. Revenue is growing at a 30% annualized rate, expected at $915 billion this year and $1.2 billion in 2022. The firm is racking up operating losses but has enough working capital to last for years.
“We’re investing for growth, and it’s not the right time to get to operating profits,” Levchin says.
Affirm isn’t the only player in the space.
(APT.Australia), an Australian company traded in the U.S., has been a pioneer. PayPal launched a “pay in 4” service last year, and
(AXP) has entered the market. Private companies offering BNPL include Klarna, Quadpay, and Bread, recently acquired by
Alliance Data Systems
The companies are capitalizing on consumer fatigue with credit-card fees and charges. Card issuers raked in $135 billion in late fees and interest payments last year, according to Deutsche Bank analyst Bryan Keane.
“This is a big pool up for disruption on the consumer side,” he wrote in a recent note.
Outstanding card debt fell about $100 billion last year, to $820 billion at the end of 2020, according to the Federal Reserve Bank of New York.
BNPL accounted for 1% of U.S. e-commerce sales before the pandemic, worth $9.5 billion, but it’s growing rapidly and is expected to reach 4.8% by 2024, or $80 billion in U.S. sales volume, according to FIS. It’s even more popular in parts of Europe, such as the UK. and Sweden, and it has gained a strong foothold in Australia.
Affirm has expanded its merchant network to 12% of the top 500 online retailers, ahead of Afterpay and Klarna, according to Morgan Stanley. It’s overexposed to Peloton, which accounts for 24% of Affirm’s revenue, but the percentage is declining as Affirm grows its merchant base, partly through its partnerships with e-commerce platforms
(ADYEN.Netherlands). It’s launched high-yield savings accounts, and it plans to issue a debit card this year, expanding BNPL to smaller, everyday transactions.
The economics work because of the fees embedded in the service. Consumers don’t see higher prices using BNPL. Instead, merchants pay a fee that, for Affirm, averages 5.8% of a sale, according to Morgan Stanley. Merchants have been willing to pay up because the installment plans reduce friction at checkout and make purchases more palatable.
Peloton is able to offer its $1,900 exercise bike for $49 a month, with 0% interest. Affirm’s data also tell merchants “what is and isn’t working to drive incremental sales,” according to Keane. Peloton declined to comment on its relationship with Affirm.
To be sure, the installment-plan economics may not stay attractive forever. price competition in merchant fees could heat up; PayPal charges 2.9%, for instance, though it doesn’t offer longer-term installment plans and limits shopping carts to $600.
The industry could also face stiffer regulation based on concerns that BNPL is encouraging consumers to overextend financially. And the Federal Reserve will eventually raise short-term interest rates. That would make it tougher for BNPL companies to offer no-interest deals, and it could erode their margins.
But Levchin says that Affirm has done well in higher-rate environments and that the company has hedges to protect against rising rates. He adds that the firm’s credit metrics are healthy and that loan write-offs have trended down. “We’re feeling quite good about the financial health of our portfolio,” he says.
How much is Affirm’s stock worth? Wall Street’s price targets range from $92 to $160. Even the low point suggests more than 30% of upside.
Credit Suisse argues that the stock is worth $105, based on a multiple of 30 times 2022 sales estimates. That would be about three times PayPal’s valuation, but Affirm is growing revenue about 40% faster than PayPal. Assuming that Affirm can keep up its growth, it could be a stock to buy now and hold for later.
Write to Daren Fonda at [email protected]