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Here is a shocking fact to behold: within the last five months, the market value of Affirm (AFRM)—the widely touted US market leader in the burning-hot Buy Now, Pay Later (BNPL) sector—has plummeted by about $35 billion. At one point this week Affirm’s market capitalization dipped below $10 billion for the first time since going public in January 2021.
This is especially surprising for at least two reasons: a) the company was founded, and is run, by Max Levchin, who’s usually considered to have magical Wall Street powers; b) Affirm continues to post phenomenal growth numbers (more on this below).
So what is going on?
Yes, fintech and technology stocks in general have had a tough time since late 2021, but Affirm has cratered even relative to that correction, and despite the stock’s upward thrust in recent days. Here is Affirm’s performance over the last six months until Friday’s market close, compared to the tech-loaded Nasdaq index:
This is not what you expect from a company posting 77% annual revenue growth, and total transaction growth of 218%. You can forgive Affirm’s leadership for being a bit flummoxed by this treatment. Levchin told Bloomberg News in mid-February: “The market seems to be having a bit of an identity crisis. We are certainly not.”
There are several theories about Affirm’s plunge. One is a generalized sense of market jitters, not helped by Russia’s invasion of Ukraine. On March 11, Bloomberg reported that Affirm had delayed a proposed asset-backed securities sale on Friday after a good portion of it had already been sold to money managers.
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A major investor in the top-rated portion of the deal, also its largest tranche at more than $400 million, was said to have backed out at the last minute due to general market volatility that may have led to wider risk premiums than the company wanted, three people with knowledge of the matter said. That AAA slice was almost entirely sold when the transaction was halted, two of the investors said.
Yet it’s clear from the chart above that the company’s market troubles go back months further. The tumble beginning in mid-November suggests that investors were spooked (as in many cases) by the increasing certainty of the Federal Reserve raising interest rates to combat historic inflation. BNPL, after all, is a kind of loan, often an interest-free loan. If rising interest rates make capital more expensive for Affirm to acquire, it stands to reason the company will make less money. The company acknowledged this when it announced earnings in mid-February; it argues, however, that interest rate hikes in the amounts currently contemplated will have only a modest effect on the metric it uses to gauge its financial health (which is revenue-minus-transaction-costs as a percentage of gross merchandise value, or the total amount purchased).
Another theory is that increased competition in the BNPL space is strengthening the negotiating power of retailers, allowing them to pay less to Affirm, especially going forward. There is also the issue of ongoing regulatory investigations of Affirm and other BNPL companies, which could interfere with future growth and profits.
But there is a broader sense that BNPL as it has been practiced is not necessarily what consumers want, or even what BNPL companies want to offer. (An Affirm representative cited to the Observer how tiny the BNPL market is right now, especially in the US, along with projections for growth, and said that BNPL is “a very attractive industry to be in.”)
Maybe. But numerous surveys have shown a large percentage of BNPL incurring debts they couldn’t afford. This week, Bloomberg reported on a survey showing that nearly a quarter of BNPL users end up with increased debt because they use credit cards to pay off the BNPL loan.
The dynamic of a lot of fintech companies that have gone public recalls so vividly the dot-com era; there is a giddy helium around the initial idea and growth that sidesteps any issues of profitability. But once market reality and competition set in, much of that helium shoots out of the stock balloon, and it’s not always obvious, especially in the absence of profit, that it will reinflate.