1 High Potential Growth Stock To Avoid Now
As markets dropped at the beginning of 2022, growth stocks took a nosedive. Even big name firms got a severe haircut. Netflix (NFLX) fell by more than 70%, Salesforce (CRM) dropped by over 36%, and Meta Platforms Inc. (META) plummeted more than 52%.
But not all stocks are made equal. Some have wide moats that will recover during the next bull market while others should be avoided. One contender on the “do not touch” list is Affirm.
The Competitive Landscape Just Got Tougher
Affirm allows consumers to pay for items from their favorite brands over time with no late fees or compound interest. This flexibility helps shoppers buy the things they want without fronting the entire cost, a concept that has disrupted the payment industry.
On paper, Affirm has everything needed to make big moves in the “buy now, pay later” market, but a closer look reveals losses and little to no competitive edge. The list of “buy now, pay later” service providers is lengthy, including Block (via Afterpay) and Paypal.
Visa and Mastercard announced they would offer their own BNPL products in the future — and now Apple is also joining that list.
Affirm poured money into its growth, reporting a net loss of $430.9 million in 2021 compared to $112.6 million in the fiscal year 2020. This in spite of Affirm (NASDAQ:AFRM) reporting revenues of $870.5 million in 2021.
Apple Is Moving Into the BNPL Space
Apple’s entry into the BNPL space could be a game-changer that significantly affects companies like Affirm and even its European competitor, Klarna.
In early June 2022, Apple announced that, after the tech giant releases its next version of iOS, consumers will be able to use its BNPL service when using Apple Wallet.
This service will allow consumers to buy items with no money down, paying for purchases in installments with no interest or fees. Loans will be funded through Apple’s own balance sheet, and credit checks will be handled through an internal subsidiary, moving the company further into the financial services space.
Although only around 5% of purchases made in the United States involve the BNPL format – suggesting ample room for growth for all parties – shares of Affirm slipped.
On June 6, 2022, Apple made its announcement. At that time, shares of AFRM were trading for $23.72. From then on, share prices dove all the way to the mid-teens. Considering the company’s 52-week low is $13.64 and its high is $176.65, the situation looks as bleak as ever for AFRM investors.
Other Red Flags for Affirm’s Future
In 2021, AFRM was one of the hottest initial public offerings — so what happened?
Widening losses are one primary concern, as well as rising interest rates and inflation, which just recently hit a 40-year high.
Because the BNPL market mainly targets younger, lower-income consumers who cannot get approved for traditional credit cards, inflation could hit this market hard. While the bulls argue that inflation will attract more consumers to use BNPL services, overall spending could still decelerate.
To stem the rising tide of inflation, the Federal Reserve has aggressively hiked interest rates, affecting companies that borrow money to lend to their users — like Affirm.
This further highlights why Apple is such a threat. The tech giant ended its latest quarter with $193 billion in cash so it doesn’t need to borrow capital to then loan it out to consumers, unlike Affirm.
To offset pressure from rising interest rates, Affirm would need to charge higher rates and increase merchant fees. However, the company recently stated that it would be willing to continue operating at a loss to remain competitive against its growing list of competitors. That’s not exactly music to investors’ ears.
Although inflation and rising interest rates are out of Affirm’s control, the company is effectively giving its services away, sparking many investors to wonder if Affirm is running a sustainable business. The strategy, combined with a daunting competitive landscape, means that investors may be best served by steering clear of this stock for now.
Is There a Silver Lining for AFRM Investors?
If you have already invested in AFRM or are interested in buying shares, know it is not all doom and gloom.
When looking at Affirm’s partners, which include Walmart and Amazon, it’s easy to see why investors got excited about this BNPL company in 2021. Time will tell what effect these partnerships will have on Affirm’s gross merchandise volume (GMV).
Affirm has also introduced its debit card, a move aimed at increasing the number of annual transactions. Affirm’s average active consumer only uses the service for 2.3 transactions annually, reserving the service for big-ticket items. The company hopes that introducing the Affirm Debit+™ card will encourage more everyday purchases. This card allows consumers to pay upfront or make interest-free payments over time.
While Affirm was one of the first North American BNPL companies, the company’s unclear path to profitability isn’t overly exciting to investors. If interested in fintech investments, keep your eye on Affirm’s partnership with Amazon to see how it influences the company’s next few quarters.
