Here’s what you need to know about Affirm Holdings in 2022

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Affirm Assets (NASDAQ: AFRM) the stock was certainly not short of drama in 2021. From a January initial public offering price of $49 per share to a February high near $147, to a May low of 46.50 $ to return to a November high of $176.65, followed by a return to its current price near $79, the buy now, pay later outfit sent shareholders on a rollercoaster ride.

At least a good part of this volatility can be attributed to the novelty of the title and Industry. However, that shouldn’t be as big a factor in 2022 now that investors have a firm grip on the organization as well as its short-term lending business. From there, Affirm stocks are more likely to mirror the underlying business and less likely to be pushed and pulled by hype and headlines.

Image source: Getty Images.

To that, there are three big questions that will impact the stock’s action this year. Current and potential investors should familiarize themselves with each of them.

Buyers love to buy now, pay later

If you’re not familiar with the idea, it’s pretty simple: Buy Now, Pay Later (BNPL) is an alternative to conventional credit cards that allows consumers to make large purchases by taking out a short-term loan. term. Data from C+R Research suggests that the average BNPL borrower’s total debt is $883, with clothing and electronics being the most common BNPL purchases.

This is a relatively new company based on the principle that conventional credit cards are not suitable for all consumers. As such, the industry has only scratched the surface of its potential. Kaleido Intelligence estimates that the option will generate $258 billion in global spending in 2025 alone, growing at an average annual rate of 27% between 2020 and thereafter to reach that threshold.

For perspective, the most recent review of Affirm’s loan portfolio indicates it is worth just over $2.2 billion, with much of this activity the result of spending preferences developed during the shutdowns. pandemics of 2020. As one of the biggest names in the industry, Affirm is well positioned to capture a significant share of industry growth.

Consumer creditworthiness is down

However, growth in the BNPL industry comes at a price, and Affirm is no exception.

The inherent problem with making it easier for consumers to spend money is that it’s only a matter of time before they use the option irresponsibly. To this end, LendingTree says that two out of three BNPL users admit that these loans caused them to spend more than they normally would have had to. As a result, a Qualtrics survey commissioned by Credit Karma suggests around a third of BNPL borrowers have fallen behind on their payments. Although one of the main objectives of BNPL’s services is to obtain a short-term installment loan without a credit check, Credit Karma adds that a third of these borrowers saw their credit rating suffer once they have fallen behind in their payments.

Affirm sees the same deteriorating dynamic in its own loan book. Non-delinquent loans fell from 97.5% of its portfolio in March last year to 94.7% at the end of September. Conversely, delinquent loans increased from 2.4% to 5.3% of its loan portfolio during this six-month period.

Affirm's loan portfolio is increasingly delinquent.

Data source: Affirm Holdings. Table by author.

In purely numerical terms, the change is nominal. When you talk about the performance of a loan portfolio, that’s a big change. Also note the direction of change, which may continue as the business expands its reach.

Regulators are looking

It’s not as if some consumers’ mounting debt and subsequent deterioration in their credit ratings has gone unnoticed. Although BNPL’s activity has so far escaped most regulatory scrutiny, in December the US Consumer Financial Protection Bureau opened a formal investigation into five different BNPL lenders, including Affirm. The Bureau explains that it is “concerned about debt accumulation, regulatory arbitrage and data collection in a consumer credit market that is already rapidly changing with technology.”

Nothing has come out of the probe yet. And it is possible that nothing will ever be. However, the fact that a federal government agency is beginning to review the entire industry opens the door to potential legislation that could cripple or even outright cripple BNPL’s business as we know it.

Too many unknowns

None of this is to say that Affirm is doomed. Even if the aforementioned challenges turn into problems in their own right, the premise has been proven. Affirm may have to adapt, but with analysts’ calls for an additional 47% revenue growth this year, bringing the company closer to profitability, there is room for change.

Analysts expect Affirm to see significant revenue growth through 2024, but not enough to generate profits.

Data source: Thomson Reuters. Table by author.

The fact is, there are simply too many unknowns to make a bold, blind bet on the action. That’s true even with Affirm’s stock price down 56% from the November peak, seemingly ripe for a rebound. At best, this is a speculative trade until we see more of the things described above unfold.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.