Buy now, pay later (BNPL) is increasingly popular with young consumers who want flexible payment options without the burden of racking up credit card debt. These loans are underwritten per transaction, giving borrowers more transparency and control over their debt. Additionally, many BNPL loans are interest-free.
Affirm (AFRM -3.31%) is one of a handful of companies fighting to lead this industry, which some estimate will grow by more than 24% annually through 2030 in the U.S.
The company went public during the infamous "everything bubble" in 2021 and trades miles below its former high. However, the evidence is mounting that this $15 billion market-cap stock could become a fintech giant, creating a compelling long-term opportunity for tremendous investment returns.
Partnerships and product innovation to lead
Anyone can lend money, but staying in the BNPL business is hard if you can't do it well. That's probably why Apple threw its hat in the BNPL ring last year and exited the business earlier this year. Apple instead has partnered with Affirm for its BNPL needs. Affirm has done a great job partnering with power retailers to get in front of as many consumers as possible as quickly as possible.
Roughly 18.6 million consumers use Affirm, which provides BNPL services to Shopify sellers, e-commerce leader Amazon, and more than 303,000 merchants. The company makes money from a combination of interest-bearing loans and merchant fees. The important thing is that more transactions are flowing through its platform over time. Affirm's gross merchandise value was $7.2 billion last quarter (Q4 of Affirm's fiscal year), a 31% year-over-year increase.
BNPL is currently an e-commerce phenomenon, but that's changing. The estimates I cited earlier also include growing point-of-sale opportunities over the coming years. Affirm has that covered as the first BNPL company to launch a physical charge card. The Affirm Card acts as a debit card but lets users split transactions into BNPL loans at the moment of purchase or retroactively. Affirm announced the card in 2021, and it now has about 1.2 million users.
The card's potential to capture point-of-sale BNPL opportunities, combined with key strategic partnerships, points to significant growth and potential market share gains during the coming years.
The path to profitability
Affirm technically isn't profitable yet, but it's hitting new milestones. The company recently turned a non-GAAP (adjusted, meaning not in accord with generally accepted accounting principles) operating profit and expects to continue heading in the right direction. As Chief Executive Officer Max Levchin said in the company's most recent shareholder letter, "The path to reaching any profitability goal is simply more transactions."
You can see the quarterly progression below:
Image source: Affirm Holdings.
Affirm is trending in the right direction, which gives me confidence that its business model can eventually swing to profitability. Additionally, the company has a whopping $2.1 billion in cash and has generated more than $290 million in free cash flow (what's left of cash flow after capital spoending) during the past four quarters.
Profit is a waiting game for Affirm, and investors can afford patience thanks to a strong balance sheet.
A potential millionaire maker? It depends.
Affirm's long-term potential hinges on two questions:
- How much will BNPL replace traditional credit cards? That will determine how big the pie is.
- Where will Affirm land among the competitors? That will determine Affirm's share of the pie.
The good news is that financial services are a multitrillion-dollar industry. Some payment companies are worth hundreds of billions of dollars, while Affirm is worth just $15 billion today. There is a potential future where tens of millions of people use Affirm's card and BNPL services.
That BNPL is most popular among young consumers, including millennials and Gen Z bodes well for the industry's future. Affirm's strong position among retailers, especially Apple, could be huge in establishing market share as the industry develops during the rest of the decade.
It's hard to value Affirm's stock based on its financials, especially since it's still so early in the game. However, Affirm could be a multibagger stock if it can maintain its current growth over the next five years and become a mainstream brand among consumers. Whether that makes it a millionaire-making opportunity isn't clear, but it's clear that Affirm has loads of long-term potential.
