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A year ago, there was little holiday cheer at Affirm. The point-of-sale lender was confronting rising interest rates, recession fears and weakening consumer spending. Affirm shares ended 2022 down 90%, wiping out billions of dollars in market value.

Affirm investors are wrapping up 2023 in a much different mood.

The stock skyrocketed 430% in 2023, as of Wednesday’s close, outperforming all other U.S. tech companies valued at $5 billion or more. The next-best performer was Coinbase, which shot up 423% largely because of bitcoin’s rebound.

With the Federal Reserve setting the stage for interest rate cuts in the year ahead and more retailers signing onto Affirm’s buy now, pay later offerings, or BNPL, fear of a doomsday scenario for the company has faded. Shares of Affirm got a big boost in November after the company inked an expanded partnership with Amazon, and BNPL purchases hit an all-time high on Cyber Monday.

“The expectation was the consumer was going to be toast, unemployment was going to pick up and higher interest rates would destroy everything, and the exact opposite has happened on all fronts,” said Tom Hayes, chairman at Great Hill Capital, which doesn’t have a position in the stock. “So that’s why you have a scenario where Affirm can start to perform.”

Created in 2012 by PayPal co-founder Max Levchin, Affirm is competing with companies including Klarna, Block’s Afterpay and Zip in the burgeoning BNPL market. Shoppers who choose to pay with a BNPL service split their purchase into four or more installments typically over a period of three months to a year, without accruing compounding interest. The lenders make money from interest payments and by charging merchants fees to offer their lending services.

Retailers benefit by giving consumers another option for purchasing a skateboard, watch or a gift for a family member, and one that can come with less sticker shock, resulting in fewer abandoned carts.

Affirm’s run-up

Affirm made its public market debut on the Nasdaq in January 2021, as the Covid-19 pandemic was driving a surge in adoption of BNPL services. Shoppers flush with stimulus checks used the small loans when buying clothes, electronics and Peloton exercise bikes, which at one point accounted for 30% of Affirm’s revenue. Online storefronts rushed to add BNPL as an option at checkout.

But by early 2022, Affirm’s share price had fallen more than 60% from its 2021 peak. The rest of the year was just as gloomy as soaring interest rates made it more expensive for Affirm to borrow money to fund installment loans. In February 2023, Affirm cut 19% of its workforce, and executives said macro headwinds and “negative consumer sentiment” would likely persist for the remainder of the fiscal year.

Affirm shares soar on 'buy now, pay later' deal with Amazon

As it turns out, they were overly bearish.

Affirm shares started climbing higher in August after the company’s fiscal fourth-quarter earnings report. The company picked up new merchant deals in sectors beyond retail, such as travel, wireless, ticketing and health care. The stock has more than doubled in the fourth quarter, boosted by an announcement last week that Affirm would offer BNPL loans at Walmart‘s self-checkout kiosks.

Even with their dramatic bounce back, Affirm shares are about 70% below their high in November 2021.

Heading into 2024, BNPL lenders face cooling inflation and an optimistic interest rate environment.

Dan Dolev, managing director at Mizuho Securities, said Affirm is in a strong position to retain users. He pointed to new merchant deals and the expanding market for BNPL offerings in physical stores. Affirm says 16.9 million people have used its services, and the company counts more than 266,000 merchant partners.

Affirm is eyeing international expansion and has launched a debit card that lets customers pay upfront or in installments. Affirm announced at its investor day last month that it plans to introduce a spending account tied to its debit card that will allow for ATM access and direct deposit capability.

“The next year or two years are going to be something very different,” said Dolev, who has a buy rating on Affirm shares. “Now they’ve got the brand, and what are they going to do with it? They’re going to turn it into a full-fledged financial services firm.”

‘David against Goliath’

Hayes sees more cause for skepticism. He said Affirm faces an “uphill battle” competing with entrenched operators such as PayPal and Block, as well as credit card companies such as American Express, Citi and Chase that have jumped into installment loans.

“It’s David against Goliath, and Goliath is going to win,” Hayes said.

Hayes said Affirm is going down a similar path to online lender SoFi, trying to “have a thousand different projects, and say we’re as big as JPMorgan, but at the end of the day, it’s just simply not going to work.”

BNPL lenders also face heightened risk of users failing to make payments on time. A March report by the Consumer Financial Protection Bureau found BNPL users were on average more likely to have higher levels of credit card debt. BNPL borrowers also tend to have lower credit scores, the CFPB said, with an average score in the subprime range of 580 to 669.

The Affirm website home screen is displayed on a laptop in an arranged photograph taken in Little Falls, New Jersey, on Dec. 9, 2020.

Gabby Jones | Bloomberg | Getty Images

An Affirm spokesperson didn’t provide a comment for this story but pointed to past comments from company executives.

“As our network grows, our moats get deeper,” Levchin said at the company’s investor forum in November. “We get more data. We underwrite more transactions. We meet more people.”

Affirm’s defaults remain low by industry standards. Average delinquency rates for peers, such as LendingClub, SoFi, Upstart and OneMain Financial, increased from 5.7% to 6.3% between January and November, while Affirm’s delinquency rate fell from 2.8% to 2.6%, Jefferies analysts wrote in a report last month.

Affirm says it bases loan decisions on a variety of data points in addition to a user’s credit score.

“Our process involves looking at credit report data, but could also involve some Affirm-specific stuff, like what we know about the merchant and the thing they are about to sell you,” Levchin said in a release last year.

As BNPL adoption grows, regulators are keeping a close eye on the space. Last week, three U.S. senators penned a letter to the CFPB urging the agency to monitor the uptick in BNPL usage during the holidays, saying it could leave consumers overextended. The CFPB announced in September 2022 that it would subject BNPL to greater oversight, in line with credit card companies.

Wells Fargo issued a report earlier this month that described BNPL loans as “phantom debt” that may be lulling “consumers into a false security in which many small payments add up to one big problem.” As it stands today, the industry is “not a major problem for consumer spending yet,” Wells Fargo economists Tim Quinlan and Shannon Seery Grein wrote.

Since BNPL loans are not currently reported to major credit reporting agencies, they wrote, there is “no way to know when this phantom debt could create substantial problems for the consumer and the broader economy.”

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