Technology
Thursday, December 28th, 2023 5:18 pm EDT
Key Points
- Affirm’s Remarkable Stock Turnaround: Affirm, a point-of-sale lender, faced significant challenges in 2022 with a 90% decline in its shares due to rising interest rates, recession fears, and weakening consumer spending. However, in 2023, the company experienced a remarkable stock turnaround, surging by 430% and outperforming all other U.S. tech companies valued at $5 billion or more. The Federal Reserve’s indication of future interest rate cuts and increased adoption of Affirm’s buy now, pay later (BNPL) offerings contributed to this turnaround. Key partnerships, such as an expanded deal with Amazon, and a surge in BNPL purchases on Cyber Monday further fueled Affirm’s resurgence.
- Challenges and Opportunities in the BNPL Market: Affirm, founded in 2012 by PayPal co-founder Max Levchin, operates in the competitive BNPL market alongside companies like Klarna, Afterpay, and Zip. The BNPL model involves consumers splitting purchases into installments without accruing compounding interest. Affirm faced challenges in early 2022, including a significant drop in share prices and a workforce reduction. However, its recovery began in August 2023, driven by new merchant deals in various sectors and an announcement to offer BNPL loans at Walmart’s self-checkout kiosks. While Affirm’s shares have doubled in the fourth quarter, they remain approximately 70% below their peak in November 2021. Affirm is exploring international expansion and diversifying its services with the introduction of a debit card.
- Skepticism and Regulatory Scrutiny: Despite the positive momentum, skepticism remains, with concerns about Affirm facing stiff competition, particularly from established players like PayPal, Block, and credit card companies entering the installment loans space. Tom Hayes of Great Hill Capital sees it as a “David against Goliath” scenario, where entrenched operators may have the upper hand. Additionally, the BNPL industry faces the heightened risk of users failing to make payments on time. A report by the Consumer Financial Protection Bureau highlighted that BNPL users, on average, have higher levels of credit card debt and lower credit scores. Regulatory scrutiny is intensifying, with three U.S. senators urging monitoring of BNPL usage during the holidays, and Wells Fargo describing BNPL loans as “phantom debt” that could pose challenges for consumers and the broader economy, particularly since they are not currently reported to major credit agencies.
In 2022, Affirm faced significant challenges with a 90% decline in shares, attributed to rising interest rates, economic concerns, and reduced consumer spending. However, the landscape shifted dramatically in 2023, witnessing a 430% surge in Affirm’s stock value, outperforming other U.S. tech companies valued at $5 billion or more. The Federal Reserve’s indication of upcoming interest rate cuts, coupled with an expanding list of retailers adopting Affirm’s buy now, pay later (BNPL) services, contributed to the positive trend. An extended partnership with Amazon and record BNPL purchases on Cyber Monday further boosted Affirm’s position.
Founded by PayPal co-founder Max Levchin in 2012, Affirm competes in the BNPL market with companies like Klarna, Afterpay, and Zip. The BNPL model involves consumers splitting purchases into installments without incurring compounding interest. Affirm generates revenue from interest payments and merchant fees. Despite a challenging period in early 2022, the company’s stock began to rebound in August 2023, driven by new merchant deals beyond retail, including travel, wireless, ticketing, and healthcare.
As of the fourth quarter, Affirm’s shares had more than doubled, fueled by an announcement of BNPL loans at Walmart’s self-checkout kiosks. However, even with this rebound, Affirm’s shares remain approximately 70% below their peak in November 2021. Heading into 2024, the BNPL sector faces an environment of cooling inflation and favorable interest rates. Affirm, with its expanding market and new merchant deals, is positioned to retain users and is exploring international expansion. The company recently launched a debit card and plans to introduce a spending account tied to the card, aiming to evolve into a comprehensive financial services firm.
While some analysts express optimism about Affirm’s trajectory, others, like Tom Hayes of Great Hill Capital, remain skeptical. He views Affirm’s competition with established players like PayPal, Block, and credit card companies as an “uphill battle.” Affirm’s move into various projects draws comparisons to the challenges faced by online lender SoFi.
Concerns within the BNPL industry include the risk of user payment defaults. A Consumer Financial Protection Bureau report indicates that BNPL users tend to have higher credit card debt and lower credit scores. Affirm’s spokesperson emphasizes the company’s low default rates, attributing it to a comprehensive decision-making process that considers various data points beyond credit scores. As regulators closely monitor the BNPL space, three U.S. senators have urged the Consumer Financial Protection Bureau to monitor the increased usage of BNPL during the holidays, expressing concerns about potential consumer overextension.
Wells Fargo released a report describing BNPL loans as “phantom debt,” cautioning that the industry might be lulling consumers into a false sense of security. The absence of reporting BNPL loans to major credit agencies raises concerns about the potential impact on consumers and the broader economy.
For the full original article on CNBC, please click here: https://www.cnbc.com/2023/12/28/affirms-stock-quintupled-this-year-beating-all-tech-peers.html
