Affirm(NASDAQ: AFRM), a leading provider of buy now, pay later (BNPL) services, went public on Jan. 13, 2021. It soared from its IPO price of $49 to a record high of $168.52 on Nov. 4, 2021, but it dropped below $9 the following December.
The bulls were initially impressed by Affirm's rapid growth and early mover's advantage in the booming BNPL market. However, they retreated as its growth cooled off and rising interest rates compressed its valuations and highlighted its ugly losses.
But as of this writing, Affirm's stock trades at about $66. Its stock bounced back as interest rates declined and its growth accelerated again. Can it maintain that momentum and drive its stock even higher over the next three years?
Image source: Getty Images.
Affirm's BNPL platform helps merchants and customers split their purchases into smaller installment plans. These "microloans" are attractive payment options for younger and lower-income consumers who can't get approved for credit cards yet. It doesn't charge any interest on purchases split into four payments, and it doesn't charge any compound interest or hidden fees.
Affirm negotiates its BNPL fees with each merchant, but they can be lower than the 1.5% to 3.5% swipe fees charged by most card processing networks. That's why big retailers like Amazon, Walmart, and Target all adopted Affirm as an alternative to traditional card-based payments.
Affirm's growth in active merchants, active consumers, transactions per active consumer, and gross merchant volume (GMV) all soared throughout fiscal 2021 and fiscal 2022 (which ended in June 2022). That growth was driven by a surge in online shopping throughout the pandemic, stimulus checks, and social media campaigns aimed at younger consumers. It also gained thousands of new merchants by integrating its BNPL services into Shopify's e-commerce platform.
Metric
FY 2021
FY 2022
FY 2023
FY 2024
Active Merchants Growth
412%
710%
8%
19%
Active Consumers Growth
97%
96%
18%
13%
Transactions per Active Consumer Growth
8%
31%
30%
26%
GMV Growth
79%
87%
30%
32%
Revenue Growth
71%
55%
18%
46%
Data source: Affirm.
But Affirm's growth decelerated in fiscal 2023 as the pandemic-era tailwinds dissipated and inflation curbed consumer spending. Its transactions from Peloton, which was once its top customer, also dried up in that tougher market. As Affirm's growth cooled off, more competitors -- including Block's (NYSE: SQ) Afterpay and PayPal's (NASDAQ: PYPL) Pay in 4 -- carved up the fragmented BNPL market. That pressure, along with its persistent losses, crushed its stock.
But in fiscal 2024, its growth accelerated as it gained new merchants, issued its Affirm Card (which merges a debit card with BNPL options) to more shoppers, and benefited from higher sales of travel tickets and general merchandise in a warmer macro environment. Those two markets accounted for half of its GMV in the fourth quarter of 2024. Its loans that were delinquent for over 30 days also held steady year over year at just 2.4% of its total loans by the end of the fourth quarter.
Affirm remains deeply unprofitable, but its operating margin improved from negative 43.6% in fiscal 2021 to negative 26.5% in fiscal 2024 as it scaled up its business, trimmed its workforce, and reined in its other expenses.
For fiscal 2025, Affirm expects its GMV to grow at least 28% to over $34 billion. It also expects its operating margin to turn positive on a generally accepted accounting principles (GAAP) basis by the fourth quarter of the year and for those margins to stay positive in the future. Analysts expect its revenue to rise 33% for the full year.
From fiscal 2024 to fiscal 2027, analysts expect Affirm's revenue to grow at a compound annual growth rate (CAGR) of 26%. They also expect it to turn profitable on a GAAP basis in fiscal 2026 and grow its net income by 169% in fiscal 2027.
With an enterprise value of $25.3 billion, Affirm looks reasonably valued at 8 times its projected sales in fiscal 2025. Assuming its forward valuations hold steady, it meets Wall Street's estimates and grows its revenue by another 26% in fiscal 2028, its enterprise value could swell more than 90% to $48.8 billion over the next three years.
Yet Affirm is still a stock that is highly sensitive to inflation, interest rates, and other macro headwinds. Those challenges could throttle its growth, cause its delinquency rates to spike, and disrupt its plans to generate stable long-term profits. Investors should carefully weigh those risks against the potential rewards before chasing Affirm's recent rally.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Block, PayPal, Peloton Interactive, Shopify, Target, and Walmart. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
