3 Top Buy Now Pay Later Firms: 60% Upside?
Investors have been able to invest in the four major credit card companies for quite some time now. American Express, Mastercard, Visa, and Discover are no strangers to the New York Stock Exchange, and retail investors have long found something promising about these companies — namely, how America’s affinity for credit cards has the potential to make these four companies great investments over the long haul.
However, something’s changed as of late: the concept of Buy Now, Pay Later (or BNPL). Over the past several years, BNPL companies — such as Affirm, Klarna, and Afterpay — have emerged onto the scene and completely upended the credit card industry, not only as payment options but also as investment opportunities.
Now, many are flocking to invest in these BNPL companies instead of the aforementioned credit card companies. But what’s the best move? How exactly are BNPL companies disrupting credit cards, and is it something investors should be concerned about over the long term?
Buy Now Pay Later Explained
Buy Now, Pay Later is exactly what it sounds like: a payment option that allows customers to take out a short-term installment loan to make a purchase.
Buy Now, Pay Later is exactly what it sounds like: a payment option that allows customers to take out a short-term installment loan to make a purchase.
Customers repay the loan over a designated period — sometimes 30 days, sometimes eight weeks, sometimes 12-36 months — often with little to no interest or impact on the person’s credit score. Clearly, this is a very alluring concept because it allows customers to check out now while paying off the purchase in installments over time.
Additionally, BNPL providers only have to perform a soft credit check for most payment plans, making it a huge draw for people who either don’t have a credit card or don’t want to hurt their credit. Some have been known to do a hard credit check before approving longer-term BNPL plans, but even then, your score is only temporarily docked a few points at most. Of course, this also means that on-time BNPL payments don’t help your credit, either. It’s sort of a neutral thing in this regard — no harm is done, but no benefits either.
With this in mind, let’s take a look at some of the biggest BNPL companies and what each has to offer for investors.
Affirm
Back in January of 2021, Affirm became a publicly traded company. From there, its price per share has gone from $125 a share in February, down to $53 a share in May, back up to nearly $165 as recently as early November and under $100 by end of 2021.
Clearly, the BNPL company has been all over the place during this first year on the stock exchange. Looking at the company’s 12-month stock price forecast, Affirm’s price per share could rise as high as $220 or as low as $90 in the next year based on its performance so far.
A discounted cash flow forecast analysis reveals the fair market value for Affirm sits at $160 per share, a full 60% higher than where the stock trades at the time of research.
Klarna
Unlike Affirm, Klarna isn’t a publicly traded company yet. However, this didn’t stop the company from reaching a billion dollars in revenue for 2020. This suggests that an IPO is likely on the horizon, especially if Klarna tops this annual revenue for 2021.
Additionally, the company’s higher-ups have expressed interest in going public in the near future so as to not miss out on the current popularity of BNPL companies and the great potential Klarna has to profit off of investor interest.
It remains to be seen exactly when Klarna will go public, but the company is undoubtedly one for retail investors and traders to watch out for given that top tier growth equity firms like Technology Crossover Ventures are backing it.
Afterpay
With Afterpay’s recent acquisition by Block (formerly Square) back during the summer of 2021, it’s no surprise that investors and traders have flocked to the company’s stock as of late. O
ne of the primary concerns over BNPL stock is that Buy Now, Pay Later seems more like a profitable service than a promising company worth investing in for the long run, but Afterpay’s acquisition amends this by fully realizing this concern and making it a reality — now, Afterpay is allowed to simply be a service as a part of a greater whole and doesn’t have to worry about the long run like these other BNPL companies do.
How Buy Now Pay Later Differs from Credit Cards
With Buy Now, Pay Later, borrowers can’t simply pay the minimum balance due and continue carrying a balance indefinitely like you can with a credit card. The purpose of BNPL payment plans is to pay off the item in full in the shortest amount of time possible. Interest on that remaining balance doesn’t always build up with shorter BNPL plans, which also differs from a fundamental aspect of credit cards.
The real draw of these BNPL companies is the ease at which approval can be granted. This, more than anything else, is what’s really disrupting credit cards. People can get approved for a BNPL plan without even needing to get a credit card, which poses a serious threat to those credit card companies and has left several of them scrambling to create their own BNPL services in response.
However, this easy approval is also what leads to one of the major downsides of BNPL: If you can’t afford the next installment or installments in your plan, you risk seriously hurting your credit (unlike simply paying the minimum balance due on a credit card and keeping your score in good health).
Which Is the Better Investment: Buy Now Pay Later or Credit Cards?
While BNPL companies are undoubtedly the “buzzier”, more popular payment option these days, there’s no ignoring the concerns these companies pose for the long run as an investment: How will BNPL providers stay afloat without the aid of a bigger, sturdier company (like with Square and its acquisition of Afterpay)?
When will BNPL stocks like Klarna go public, if ever? And how will Affirm work to calm its roller-coaster-like activity on the stock market? Until these questions can be met with an answer, conservative investors can stick with credit card companies for the time being.
The Bottom Line: Buy Now Pay Later vs Credit Cards
Just because credit card companies might be the safer investment doesn’t mean that Buy Now, Pay Later companies aren’t continuing to boom on the stock market. Not to mention, as credit card companies develop and release BNPL plans of their own, there’s no question that the competition will only heat up even more.
At the end of the day, BNPL is a fine way for someone without a credit card or without the proper funds to make a large purchase and pay it off over time, but if you have a credit card and can afford to pay it off each month, then you might be better off simply sticking to what you know instead of taking on additional debt (no matter how short-term it may be).
