The financial industry has been a hotbed of innovation in recent years. The ways people do their banking, manage their money, and pay things are undergoing major changes as new businesses emerge to meet the changing needs of consumers.
A retail trend was recently bought now, pay later (BNPL), which is changing the way consumers and businesses view credit. Among the leaders in this niche are Affirm holdings (NASDAQ: AFRM), and it has seen strong revenue growth since its IPO in early 2021. It is also just getting started.
Here’s why Affirm is a growth stock to consider over the long term.
A leader in buy now, pay later
The Affirm app allows users to pay for the items they purchase from participating businesses in installments. It instantly assesses each customer’s credit and approves or rejects a specific purchase through BPNL within seconds. If the customer is approved, Affirm offers a range of fixed installment payment options based on cost and interest charged.
Affirm doesn’t always charge interest on BNPL purchases – 43% of its loans don’t – but when it does, that cost is factored into fixed upfront payments, allowing users better understand their overall purchasing costs. The Affirm service can be used for both online and in-person transactions, and has been integrated into the payment systems of many major retailers, including Walmart, Amazon, Shopify, as well as more than 2000 business partners. It does not charge late fees or annual fees.
Affirm generates its income by charging merchants a fee for each transaction, as well as charging interest. Affirm takes out the loans, with two banking partners.
BNPL is an alternative to using traditional credit cards. Many consumers, especially young adults, are more reluctant to rack up massive debt and see it as a more manageable option. Indeed, the major credit and charge card companies have recognized the potential of the concept, either by acquiring or launching their own BNPL services.
Founded in 2012, Affirm went public in January 2021 at around $ 90 a share, and since then the stock has had a pretty crazy run. Its price climbed to $ 176.65 per share in November, only to drop about 54% over the next two months. On Tuesday afternoon, it was trading below its IPO price at around $ 81 per share. On January 3, it fell about 10% in a massive sell-off and is down about 14% since the start of the year.
The action was caught up by the overall market downturn this fall, which hit payment companies particularly hard as concerns grew about an economic slowdown due to inflation and the sharp rise in new COVID-19 cases in because of the omicron variant. In addition, he was undoubtedly hurt by the announcement in mid-December from the Consumer Financial Protection Bureau (CFPB) of the opening of an investigation into the practices of five BNPL services, including Affirm.
Investors shouldn’t be too worried about this fading out. In fact, the fall in prices makes it a good time to buy stocks. Income growth numbers for Affirm continue to be strong, and the company has strong positive winds that should push its stock higher in the long term.
In its fiscal first quarter, which ended Sept. 30, the company generated $ 269.4 million in revenue, up 55% year-over-year, to approximately $ 112 million from fees and $ 117 million from interest income. Gross merchandise volume jumped 84% to $ 2.7 billion while the number of active users climbed 124% to 8.7 million. The number of active merchants has grown from 6,500 to over 102,000, largely thanks to Affirm being added to the Shopify platform. The company is still operating at a net loss as its operating expenses have increased due to costs associated with acquisitions as well as investments in technology, marketing and overall operations.
A potential concern for investors is the company’s higher allowance for credit losses, which reached $ 63.6 million in the first quarter of the year, compared to $ 28.9 million during the period. of the previous year. This increase is partly due to the growth in the business, but it is also due to the fact that Affirm’s customer default rate increased slightly at the end of its previous year to reach around 4%.
Affirm exceeded its revenue targets for the first fiscal quarter and raised them for the second fiscal quarter (to $ 330 million from $ 320 million) – and for its entire fiscal year 2022 (to $ 1.25 billion). dollars versus $ 1.22 billion). This was in part due to his extended relationship with Amazon. Additionally, the company is preparing for the large rollout of its Affirm Debit + card in 2022, which is a debit card that works with the user’s current account but allows for installment payments. Affirm already has more than 1 million customers on the waiting list for this product, which could considerably expand its user universe.
Globally, BNPL is an industry on the way to take off. About 55% of Americans have used BNPL, up from 37% in 2020, according to a study by The Motley Fool’s Ascent.
Additionally, by 2026, around $ 995 billion will be spent with BNPL, up from around $ 226 billion in 2021, according to Juniper Research. This presents an annual growth rate of around 34%.
With the current decline in its valuation, the price-to-sales ratio has fallen to around 22, or about half of what it was when it passed 40 in October and November. This stock may continue to experience some volatility in the short term, especially with the announcement of the CFPB survey, but in the long term, as one of the industry leaders, is in an excellent position to ride the wave. BNPL.
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