On fire! The American version of "ANT GROUP", Affirm, saw its stock price increase fivefold this year, outperforming all its peers!

A year ago, during the year-end holiday season, the atmosphere at Affirm (AFRM.US) was still quite bleak.

At that time, the financial technology company Affirm was facing macroeconomic concerns such as rising interest rates, economic recession worries, and weak consumer spending. By the end of 2022, Affirm's stock price had fallen by 90%, and its market value had shrunk by billions of dollars.

However, the mood among Affirm investors at the end of 2023 is completely different.

According to Zhitong App, as of the close of trading on Wednesday, Affirm's stock price has skyrocketed by 430% in 2023, outperforming all US technology companies with a market value of over $5 billion. Following closely behind is Coinbase (COIN.US), which has risen by 423%, mainly driven by the rebound of Bitcoin.

With the Federal Reserve signaling a shift towards interest rate cuts and more and more retailers joining Affirm's "buy now, pay later" (BNPL) model, concerns about the company's future have gradually faded. After Affirm expanded its partnership with Amazon (AMZN.US) in November, its stock price soared. On "Cyber Monday," BNPL purchase volume reached a historic high.

Tom Hayes, Chairman of Great Hill Capital, said, "People originally expected consumers to be very anxious, unemployment rates to rise, and higher interest rates to destroy everything, but everything seems to be the opposite. That's why Affirm is performing the way it is now."

Affirm, founded by Max Levchin, co-founder of PayPal, in 2012, competes with companies such as Klarna, Afterpay, and Zip. Consumers who choose BNPL services typically divide their purchases into four or more installments over three months to a year (with non-compound interest), while lenders profit by charging interest and collecting loan service fees from merchants.

Retailers also benefit from the BNPL model. By offering BNPL as an option for consumers to buy skateboards, watches, or gifts for their families, retailers can stimulate consumption and increase their sales and profitability.

Affirm's Development

Affirm went public on Nasdaq in January 2021, at a time when the Covid-19 pandemic was driving a surge in BNPL adoption. Consumers with stimulus checks were eager to purchase clothes, electronics, and Peloton bikes. Exercise bikes (which once accounted for 30% of Affirm's revenue) and e-commerce platforms have also quickly added BNPL options at checkout.

However, by early 2022, Affirm's stock price had fallen over 60% from its peak in 2021. As interest rates soared, the cost of borrowing money for installment loans became increasingly high, and the outlook for 2022 was equally bleak. In February 2023, Affirm laid off 19% of its employees, with company executives stating that macroeconomic headwinds and "negative consumer sentiment" could persist until the end of the fiscal year.

Affirm's stock price soars after reaching a "buy now, pay later" agreement with Amazon

As it turns out, the executives seemed to be too bearish.

Affirm's stock price began to climb after the release of its fourth-quarter earnings report in August. In addition to the retail industry, the company has also secured new business deals in industries such as travel, wireless, ticketing, and healthcare. Last week, Affirm announced that it will offer BNPL loans at self-checkout machines in Walmart, and as a result, the company's stock price more than doubled in the fourth quarter.

However, even with the significant rebound in stock price, Affirm's stock price is still about 70% lower than its peak in November 2021.

Entering 2024, BNPL loan companies are facing a cooling inflation and an optimistic interest rate environment.

Dan Dolev, Managing Director of Mizuho Securities, stated that Affirm is in a favorable position in terms of retaining users. He pointed out that the market for new business deals and in-store BNPL services is continuously expanding. According to Affirm, it has served 16.9 million people, and the company has over 266,000 merchant partners.

Affirm is currently focused on international expansion and has launched a debit card that allows customers to make prepayments or pay in installments. Affirm announced at its investor day last month that it plans to launch a consumer account tied to a debit card, which will allow users to use ATMs and direct deposit features.

Dolev gave Affirm a buy rating, stating that the situation for Affirm will be very different in the next year or two. He believes that after building the Affirm brand, the company's management will gradually develop it into a mature financial services company.

A tough battle

Hayes, Chairman of Great Hill Capital, is skeptical about Affirm's future prospects. He said that Affirm faces intense market competition, not only from established operators such as PayPal and Block, but also from competitors such as American Express and Citibank. Affirm is facing a "tough battle."

Hayes believes that Affirm is following a similar path to online lending company SoFi, trying to "have thousands of different projects and claim to be as big as JPMorgan Chase," but it will ultimately be proven to be unfeasible. BNPL lending institutions also face a greater risk of users failing to repay on time. A report from the Consumer Financial Protection Bureau in March stated that, on average, BNPL users are more likely to have higher levels of credit card debt. The bureau also noted that BNPL borrowers tend to have lower credit scores, with an average score in the subprime loan range of 580 to 669.

An Affirm spokesperson did not comment on this matter but cited past comments from company executives. Co-founder Max Levchin stated at an investor forum in November, "As our network grows, we gain more data, underwrite more transactions, know more people, and our moat gets deeper."

Jefferies analysts also expressed support for this view in a report last month, stating, "By industry standards, Affirm's default rate remains low. The average delinquency rate for LendingClub, SoFi, Upstart, and One Main Financial has risen from 5.7% to 6.3%, while Affirm's delinquency rate has decreased from 2.8% to 2.6%."

In addition, Affirm stated that, apart from user credit scores, the company considers various data points to make lending decisions. Levchin stated in a press release last year, "Our process involves reviewing credit report data but also includes some Affirm-specific processes, such as understanding the merchants and the goods they sell to consumers."

As the popularity of BNPL applications increases, regulatory agencies are closely monitoring this area. Last week, three US senators wrote to the Consumer Financial Protection Bureau (CFPB), urging the agency to monitor the rise in BNPL usage during the holiday season, stating that this model could lead to excessive consumer spending. The CFPB previously announced in September 2022 that it would impose stricter oversight on BNPL, similar to credit card companies' standards.

In response, Wells Fargo released a report earlier this month describing BNPL loans as "phantom debt" that could give consumers a false sense of security, as multiple small payments can add up to significant problems.

Economists Tim Quinlan and Shannon Seery Grein from Wells Fargo indicated, "Based on the current situation, the industry has not yet become a major issue affecting consumer spending. However, since BNPL loans are currently not reported to major credit reporting agencies, it is unknown when this phantom debt will pose substantial problems for consumers and the broader economy."