Confirms (NASDAQ: AFRM) I entered the market with high hopes to innovate and beat many other fintech competitors in the “buy now, pay later” market. In 2021, the company suffered major losses and now has an unclear path to profitability. Despite the record payout size, those losses increased in their most recent quarter, leaving investors even more confused. The stock price reflects these concerns, having fallen 62% from its recent high in November. And while those stocks may recover, the company behind them still doesn’t look great.
Affirm and its “buy now, pay later” competitors allow consumers to pay for items in scheduled installments, instead of using a traditional credit card. Credit card companies like Mastercard and Visa make money by charging customers fees that accrue interest and late fees. Affirm offers 0% interest in some cases, and simple interest plans with no late fees in others.
For 0% financing, Affirm makes money by charging merchants to use its services; These stores pay in the hope that Affirm’s flexible payment options will encourage customers to purchase from them. Affirm prides itself on being transparent and not taking advantage of customer mistakes like traditional credit card companies.
High growth, higher losses
After Affirm reported seemingly strong numbers in the first quarter, you’d think the stock would do well. Its growth metrics looked impressive from the first quarter of 2021 to the first quarter of 2022: Revenue rose 55%, and overall merchandise volume — the total amount of money customers spent using Affirm — increased by more than 100%. These large numbers were driven in partnership with Shopify (NASDAQ: SHOP) Which brought Avirm more than 12500 new business clients. There are 1.75 million merchants in Shopify’s platform, so this growth can continue.
But Affirm’s good numbers can’t outweigh the bad numbers. Operating loss margin has ballooned from -19% to -61.6% in the same time period. Net loss ballooned from -$3.9 million to -$306 million due to higher operating expenses from acquisitions and investments. Pumping money into its growth makes sense for Affirm, but that growth has to show up in its bottom line margins and earnings.
Zero Competitive Advantage
In Affirm’s annual report, she reports on the network effect: More consumers leads to a stronger ecosystem, leads to more merchants, which leads to additional products for purchase across Avirm plans, leads to growth, leads to deeper data insights, Which leads to help in ensuring a better experience for its customers. But when you’re in battle, having a sword only helps you if you’re the only one with a sword – or if you have one Larger sword. Affirm has the smallest sword, in battle with giants.
Both PayPal And to forbid Offering their ‘Buy Now, Pay Later’ services with a much larger customer base than Affirm’s bases. These large companies also have stronger brand appreciation. Affirm already has an early engine advantage in the North American market, but it doesn’t seem like a huge advantage given that other competitors have better brands and larger networks.
The BNPL space is a fast growing niche in the FinTech sector. According to Grand View Research, it is supposed to grow at a compound annual growth rate (CAGR) of 22.4% through 2028. The problem is not the market size and growth, but rather the segmentation within it.
There are plenty of big names in this $4.1 billion niche. Visa (NYSE: V) And Master Card Credit Card They announced in 2021 that they plan to introduce their own BNPL products in the future. Visa alone has more revenue than Affirm has overall merchandise volume, along with a much larger client network. Affirm can still carve out market share from conventional credit, but the feat looks increasingly difficult.
What is going right?
Emphasized not doing everything wrong. It has a strategic partnership with Walmart To allow customers there to purchase expensive items through Affirm. It also signed a 2021 deal with Amazon To be the only online retailer’s BNPL purchase option during the upcoming two holiday seasons. Such deals could boost Affirm’s market position and possibly help it develop a competitive advantage in a fragmented space. In the second quarter of 2022, we will see the impact on Affirm’s overall cargo volume (GMV).
The average Affirm active consumer uses only 2.3 transactions per year, with shoppers mostly holding BNPL for high-priced items. Affirm aims to grow by urging customers to use its services to make more and more purchases. From the first quarter of 2021 to the first quarter of 2022, the numbers remained roughly stagnant, rising from 2.2 to 2.3 average annual transactions per customer. It is trying to boost that number with its upcoming BNPL debit card, which could replace customers’ credit cards and get them to buy more things with Affirm. The company will also need to lower the minimum purchase price at places like Walmart, where customers can only use Affirm’s BNPL service with purchases over $144.
Affirm was one of the first companies in North America to offer BNBL services, a great idea with a lot of potential. Investor concerns about first-quarter losses sent the stock down, but Affirm’s unclear path to profitability looks more worrisome than its current numbers. Fintech investors should keep an eye on how Affirm’s partnership with Amazon affects its results in the next few quarters. At the moment, the company doesn’t offer much to get excited about – but that may change in the future.
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