Affirm Holdings, a consumer lending company in BNPL (Buy now, pay later) space, had reported a 39 percent hike in the annual revenue. Thanks to Shopify, the company witnessed growth after it signed two big deals in the last few years — one with Amazon and another with Shopify. However, the one with Shopify proved to be a game-changer. Though the company is facing certain challenges as per its full-year financial results for fiscal 2022, the Shopify deal helped it gain unprecedented growth in one area in particular.
Affirm’s Merchant Base Soar By 710%
Revenue Beat, EPS Miss and Updated Guidance are a few other companies that boosted Affirm’s business. However, most of the business came from Shopify, the e-commerce giant responsible for around 1.75 million online stores globally. When Shopify under its Shop Pay Installments banner started offering Affirm as its BNPL provider of choice, the latter witnessed a flood of new customers.
Fiscal 2022 ended on a good note for Affirm with 235,000 merchants on board as compared to 29,000 at the end of fiscal 2021. Affirm has a long way to go because the numbers are a mere fraction of Shopify’s total merchant base.
For 2022 fiscal year, customers purchased goods and services worth $15.5 billion via Affirm. Undoubtedly, the number of customers signing up to finance their purchases also grew. Recently, the company topped 14 million, double the number it had a year ago. Thus, Affirm increased its revenue 54 percent year over year to $1.3 billion.
What is BNPL?
Buy now, pay later (BNPL) is short-term financing that enables customers to make purchases and make payments later. The popularity of this new twist in installment-based lending is lately soaring because they are more user-friendly than credit cards. The loan provided to customers are usually small and repaid within a short period.
Affirm collaborates with the online stores of its merchant partners, and then appears as a payment option on the checkout page. Buyers can finance their purchases within a few clicks. Affirm has a transparent fee structure which includes annualized interest rate of between 0% and 30%. It also discloses the all-inclusive price of the purchase. If the customer repays the loan in four installments in two-week intervals, no interest or fees will be charged.
The main competitor of BNPL Companies like Affirm is the credit card. Some of the primary differences include that credit cards issued by banks have a one-size-fits-all interest rate with a range of different fees.
BNPL is one of the fastest-growing segments of the global $10 trillion payments market, and in the U.S. specifically, Affirm’s partnerships allow it to cover 60% of all online commerce. The company does face competition from payments giant Block, which acquired former stand-alone BNPL leader Afterpay last year, and also multitrillion-dollar behemoth Apple, which introduced Apple Pay Later earlier in 2022.
Affirm Stock a Buy?
A crucial issue affecting the entire BNPL industry is its inefficacy to generate profits. With ever-growing competition, companies such as Affirm have to spend more money to acquire and keep customers intact. In Fiscal 2022, Affirm total marketing expenditure was $532 million, triple than what it spent in fiscal 2021 which was $182 million. Also, rising interest rates affect lenders in two ways. First, consumers’ pocketbooks get squeezed and can result in a spike in defaults. Secondly, the cost of capital for lenders increases as they draw on outside funding to make loans available to customers.
In fiscal 2022, Affirm reported a $255 million provision for credit losses as compared to $65 million last year. This shows that the first point is becoming a key issue. Overall, Affirm ended the year with a $707 million net loss.
However, for long-term investors, there is some good news. According to a report published in nasdq.com, though Affirm’s stock has plummeted 86 percent from its all-time high and one can be skeptical in investing right now, creating a small position for the next five to ten years have chances of yielding good results.
Nasdaq report states that with a partner like Amazon, which has generated $413.8 billion in e-commerce sales over the last four quarters, Affirm has an opportunity to grow its scale like never before in the BNPL sector. Though this milestone may take time to be achieved, there is no doubt that investors won’t be able to ignore Affirm’s long-term potential due to its rapid expansion of customers and merchants base.
Disclaimer: This is not an advice or opinion on investment. Users must take caution before investing.
