The short-term outlook for the buy now/pay later giant Affirm — which announces fourth-quarter earnings Thursday afternoon — appears rocky as interest rates creep up and online shopping volume slows compared to pandemic peaks.
Affirm shares have lost $20 billion in market capitalization so far this year, with the company currently valued at $8.7 billion amid a tech-stock slump. With rising inflation adding stress to the consumer financial picture, many analysts are concerned about the company's credit quality deteriorating.
The question Affirm must answer is whether it's found a way to weed out risky borrowers and if the company's high-power merchant partnerships will be enough to help it drive healthy sales volume as it heads into the critical fall and holiday shopping seasons.
Affirm in recent months has deepened its integration as a checkout option with its partner Shopify, and its newer partnership with
This month, Affirm also deepened its relationship with longtime partner
Affirm has added millions of new customers over the last year since launching a
Affirm's biggest challenge for the remainder of the year is navigating a weakening consumer credit climate and the rising cost of funding loans in an atmosphere of higher interest rates.
"Near term, we believe Affirm is poised for continued hyper volume growth, fueled by partnerships with Shopify and Amazon, but our bullishness is tempered by the threat of increased competition, pricing pressure and concerns about their go-to-market strategy," Reginald Smith, vice president of equity research at JPMorgan Chase, said in a note to analysts Wednesday.
Interest-free credit and fast approval make BNPL an attractive payment option for consumers, who are increasingly using short-term installment credit to manage their cash flow when paying for immediate, small-dollar purchases.
Consumers remain enthusiastic about BNPL loans, based on the latest data for discretionary spending for lower-ticket purchases where Affirm is concentrated with its instant, interest-free loans, according to research by equity analysts at Morgan Stanley.
"We see the company as well-positioned to gain share among Gen Y and Gen Z demographics and we think Affirm can work through the aforementioned macro risks to regain investor confidence," Morgan Stanley said in a note to investors Wednesday.
Its Swedish rival Klarna, which has held off on a long-expected initial public offering and is expected to report earnings next week, faces many of the same challenges to credit quality and pressure on loan funding.
Klarna's market cap has fallen from $45.6 billion last year to $6.7 billion today, and analysts are looking to measure the results of a few recent initiatives.
In June, Klarna
Klarna also ramped up its
"What we're seeing in the BNPL arena right now is a test of a new business model facing challenging market conditions, and whether or not consumers will continue to use BNPL over the long run," said Nathan Hilt, a managing director at the consulting firm Protiviti. "In any economic downturn, it's a test of whether the strong will survive, and that's what we're going to see — along with the prospect of consolidation."
