Affirm Holdings, Inc. (NASDAQ: AFRM) is strategically positioned to capitalize on the explosive growth of the Buy Now, Pay Later (BNPL) market, which is projected to grow at a compound annual growth rate (CAGR) of approximately 25% into 2030. Affirm’s unique underwriting model, which evaluates each transaction individually, reduces delinquency risks and differentiates the company from traditional credit cards and its BNPL competitors. With robust revenue growth, expanding consumer adoption, and strategic partnerships—including Apple Pay integration and plans to expand into the UK—Affirm has the potential for long-term profitability. Given these factors, I rate AFRM as a Buy.
Company Overview
Affirm (AFRM) is a leader in the BNPL space, offering installment-based financing solutions for consumers. Founded by Max Levchin, a co-founder of PayPal, Affirm has built a reputation for reducing delinquency risks through its unique, transaction-by-transaction underwriting model, which differentiates it from other BNPL providers that rely on blanket credit checks. Currently, Affirm primarily operates in the United States and is working to expand internationally, with an upcoming UK rollout and partnerships that could drive increased consumer adoption in 2024.
Business Analysis
Operating Segments and Unique Moat
Affirm’s transaction-specific underwriting approach allows it to offer BNPL services with a significantly lower delinquency rate than traditional credit cards. Even as interest rates increased in recent years, Affirm maintained delinquency rates at stable levels, underscoring the resilience of its model. Affirm’s BNPL offerings extend to a variety of products and merchants, enabling greater flexibility for consumers and a broad market reach. Additionally, the Affirm Card—a recent product with flexible installment options—has seen strong growth, with active cardholders up 30% quarter-over-quarter and annual spending targeted to reach $7,000. This continued traction suggests a solid foundation for future revenue growth.
Growth Opportunities
Affirm has pursued several strategic partnerships to expand its reach and consumer base, with Apple Pay integration being a significant opportunity. Apple’s extensive reach—153 million iPhone users in the U.S. and 23 million in the UK—offers Affirm an unprecedented channel for BNPL adoption. This collaboration enables consumers to access Affirm’s BNPL options directly through Apple Pay, making Affirm a more visible option for financing. Additionally, Affirm’s entry into the UK BNPL market, while slightly late, positions it in a new growth area and complements its existing U.S. foothold. With BNPL services expected to grow at a CAGR of 26-33% globally, these partnerships and expansions represent strong growth avenues.
Competitive Landscape
Affirm faces competition from other BNPL providers like Klarna and Afterpay, as well as traditional lenders and credit card companies entering the BNPL space. However, Affirm’s unique underwriting process and high-profile partnerships provide a competitive edge, particularly as delinquency rates rise in other forms of consumer credit. While competition is intense, Affirm’s focus on consumer credit health and its expanding partner ecosystem helps it stand out as a high-quality provider within the BNPL landscape.
Financials & Balance Sheet
In its latest quarterly report, Affirm posted substantial year-over-year growth across key financial metrics:
Gross Merchandise Volume (GMV): $7.5 billion, up 32%.
Revenue: $591 million, up 48%.
Revenue Less Transaction Costs (RLTC):** $242 million, up 68%.
Adjusted Operating Income:** Increased to $93 million from a $62 million loss in the prior year’s quarter.
Operating expenses declined by $37 million year-over-year, with sales, marketing, and general administrative expenses reduced by $19 million, reflecting Affirm’s commitment to cost efficiency while growing its top line. Affirm’s solid balance sheet and focus on maintaining liquidity provide a buffer against economic uncertainty, making it well-prepared to execute its expansion initiatives.
Peer Analysis
Affirm’s premium valuation reflects market optimism about its strategic partnerships, lower delinquency model, and growth trajectory. Competitors such as Klarna and Afterpay have achieved significant market penetration in Europe but often experience higher delinquency rates and limited underwriting flexibility. Affirm’s transaction-specific underwriting model positions it uniquely to navigate economic shifts, providing it with a competitive edge, particularly as BNPL gains traction among credit-conscious consumers.
Risks
Profitability Challenges
Affirm has yet to achieve profitability, which poses risks, especially in an economic downturn. A prolonged recession or significant rise in unemployment could increase delinquency rates and reduce demand for BNPL services.
Interest Rate Environment
Affirm’s business model is sensitive to the interest rate environment. As a loan-focused company, Affirm borrows to fund BNPL loans, and higher interest rates can increase borrowing costs and reduce profit margins. While Affirm’s model has remained resilient in recent years, sustained rate increases could pressure profitability and potentially dampen demand for BNPL services.
Unemployment Risks
Affirm’s delinquency rates are tied to consumer credit health. A rise in unemployment would likely lead to higher delinquency rates as consumers struggle to repay loans. This is especially relevant in periods of economic downturn, when job loss impacts many households, potentially leading to lower consumer spending and higher risk of defaults.
Market Volatility
Approximately 10% of Affirm’s shares are shorted, contributing to stock volatility. Investors in Affirm should expect price swings, particularly in response to macroeconomic shifts or changes in interest rate policy.
Regulatory Uncertainty
As BNPL becomes more prevalent, it may face increased regulatory scrutiny, potentially impacting Affirm’s operational model or profitability. Regulatory changes around consumer credit could require adjustments to Affirm’s underwriting process, which may incur additional costs.
Conclusion
Affirm Holdings is an attractive investment opportunity for growth-focused investors willing to accept higher volatility and a high-risk tolerance. The company’s unique underwriting model, strategic partnerships, and expanding market presence make it well-suited to capture growth in the BNPL sector, projected to experience a high CAGR over the next several years. Affirm’s upcoming Apple Pay provides additional tailwinds for revenue and user growth. The growth of BNPL is expected to grow at an annual growth rate of around 25% into the end of this decade, depending upon which source you read. AFRM is well positioned in the United States and I expect their Affirms card and Apple Pay to add significantly to revenue over the next 12 months. But the BNPL market continues to add competition. WalMart just partnered with One. Institutional investors on Wall Street are very fickle eccentric investors, when growth slows, margins shrink they often become sellers even as growth continues. They see shrinking margins as an increased competition problem or a business problem. I would not personally be a long term holder of this stock. I DO NOT OWN AFRM, I see it as a trade for a high risk investor.