The market has been somewhat volatile in recent weeks as the major indexes had a down month in November, with the trend continuing in early December. Some stocks have been hit harder than others over the course of this recent swoon. But the downturn creates buying opportunities among good companies that got caught up in the ups and downs.
Affirm Holdings (AFRM -1.34%) is one such example.
This fintech has dropped from a high of $168 per share at the beginning of November to its current price of around $100 per share -- a roughly 40% decline. Here's why that actually makes it a good time to consider this stock.
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An alternative to credit cards
Affirm Holdings is a buy now, pay later (BNPL) firm offering services that are seen as an alternative to traditional credit cards. You buy something from one of its retail partners (Walmart, for example) through the Affirm app, either in-store or online. The app instantly assesses your credit and either approves or rejects the request. If approved, you pay a fixed monthly cost with options on how long you want to take to pay off the purchase. The purchase is made through a loan from one of its banking partners. For some purchases, the monthly payment will include interest, but it's determined and outlined upfront and is part of your total payment and won't change. For other purchases, there is no interest assessed. There are also no late fees or annual fees. Affirm makes money from fees paid by merchants or through interest on certain items.
The BNPL service has high interest among younger adults, as about 41% of millennials are using it (double the use from two years ago), while 36% of Gen Z use it (six times more than in 2019), according to a report from business management consultant Cornerstone Advisors. CEO Max Levchin called the growing popularity of BNPL a function of the "great unbundling of the credit card," as millennials, who came of age after the financial crisis, are hesitant to rack up credit card debt. In 2021, an estimated $100 billion will be spent using BNPL services, up from $24 billion in 2020.
Affirm is one of the largest of these BNPL firms, and many other banks and payment companies have gotten on the BNPL train, including PayPal, Square, Mastercard, and Goldman Sachs. Affirm has been around since 2012 but went public in January 2021 -- and its stock price has taken off, fueled by huge revenue gains.
In its fiscal first quarter ended Sept. 30, revenue grew 55% year over year to $269 million, driven by an 84% increase in gross merchandise volume (GMV), a huge increase in active merchants due to its adoption on Shopify's platform, and a 124% increase in active customers to 8.7 million. Also, in November, it expanded its relationship with Amazon so that it's available on all purchases over $50.
The company also raised its revenue estimates for the fiscal second quarter to $330 million from $320 million, and for the full fiscal year to $1.25 billion from $1.22 billion.
Why the decline?
After such a strong quarter and massive growth, why did Affirm's stock price tank so hard? There are a couple of factors at play here. For starters, the stock had become overvalued, as its price-to-sales (P/S) ratio had more than doubled from around 20 at the end of the June 30 quarter to almost 45 at the beginning of November. That means that investors were jumping on board, willing to pay more per dollar of annual sales.
But that changed rapidly on concerns about the omicron variant of the coronavirus and rising inflation. Concerns about omicron were related to whether or not it would cause lockdowns or restrictions, which would hurt the economy, and curtail lending and spending. As of right now, we don't know the impacts of omicron, but it doesn't appear that shutdowns are likely, as President Joe Biden said it will be countered with vaccinations, not lockdowns.
Longer-term inflation concerns were raised when Federal Reserve Chair Jerome Powell told Congress that inflation may not be as "transitory" as first believed and above-average rates could stay for a while, at least into 2022. That, in turn, could lead to interest rate hikes, as higher rates tend to slow down the economy, but lower inflation.
This could curtail consumer spending as well. However, a higher interest rate scenario could favor BNPL firms like Affirm because they either don't charge interest or have lower, built-in interest payments, and that may prove to be a preferable option to many consumers than paying higher interest rates on credit cards.
So, the good news for investors is that with the drop in stock price, Affirm's P/S ratio came back to about 28, which is closer to its historical range. The other good news is that BNPL is not going away, in fact, a recent study said it will increase more than sixfold by 2025 to $685 billion in sales -- at a compound annual growth rate of 13%.
Overall, Affirm's recent volatility appears short-term in nature. Its long-term prospects look good, as it continues to add retailers and customers and is at the forefront of a burgeoning industry. The recent drop in price and valuation makes it a good time to consider adding this stock to your portfolio.
