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Affirm Just Grew This 1 Metric by 710% Thanks to Shopify. Is the stock a buy?

Buy Now, Pay Later (BNPL) is a new version of installment loans. These consumer loans are usually small and repaid in a short period of time, and their popularity has skyrocketed lately as they tend to be more user-friendly than alternative products like credit cards.

Affirm Assets (AFRM -3.07%) is a global leader in the BNPL space, and it is enjoying major momentum thanks to two successful deals it has signed in recent years. The first deal is with the e-commerce platform giant Shopify (STORE -3.71%)and the second is with Amazon (AMZN -0.24%). Both deals will give Affirm prime real estate in their online stores.

Affirm has just released its annual financial results for fiscal year 2022 (ended June 30) and is certainly facing some challenges, but the new Shopify deal has provided a big boost in one area in particular.

The Affirm Difference

Credit cards are the primary financing product buy now, pay later is trying to disrupt. There are important differences, including the fact that credit cards are issued by banks, usually have a single interest rate and come with a range of different fees.

Affirm’s technology integrates with its merchant partners’ online stores and appears as a payment option when a customer navigates to the payment page. From there, the customer can finance his purchase in a few clicks without the need for a card. Affirm is committed to a transparent fee structure that includes an annualized interest rate of between 0% and 30%, and it discloses the all-inclusive price of the purchase up front so there is no no surprises.

If the borrower is able to repay his loan in four installments at two-week intervals, he will not pay any interest or fees.

BNPL is one of the fastest growing segments of the $10 trillion global payments market, and in the US in particular, Affirm’s partnerships enable it to cover 60% of all commerce on line. Company faces competition from payments giant To blockwhich last year acquired former BNPL standalone leader Afterpay as well as the multi-trillion dollar giant Applewhich introduced Apple Pay Later earlier in 2022.

Affirm’s merchant base has grown by 710%

A big advantage of Affirm is its agreement with Shopify. This company is responsible for the online stores of 1.75 million merchants worldwide. So when it began offering Affirm as the BNPL provider of choice under its Shop Pay Installments banner, Affirm immediately gained access to a flood of new customers and partners.

Thanks primarily to Shopify, Affirm ended fiscal 2022 with 235,000 merchants on board, which is a 710% jump from the 29,000 it had at the end of fiscal 2021. There is still a long trail of growth from here as this is only a fraction of Shopify’s total Merchant Base.

Naturally, the number of customers signing up to finance their purchases with Affirm has also exploded. It topped 14 million most recently, nearly double the number it had a year ago, and customers have purchased $15.5 billion worth of goods and services using Affirm for all of fiscal year 2022. As a result, the company was able to increase revenue by 54% year-over-year to $1.3 billion.

Affirm stock could be a long-term buy, but there are risks

A key problem plaguing the BNPL industry as a whole is its inability to generate profits. As competition continues to grow, companies like Affirm need to spend more money to acquire (and retain) customers. Affirm spent $532 million on marketing in fiscal year 2022, nearly triple the $182 million spent in fiscal year 2021.

Moreover, rising interest rates have a double impact on lenders. First, they squeeze consumer wallets and can lead to increased defaults, and second, they increase the cost of capital for lenders who rely on outside funding to lend to customers. Affirm had an allowance for credit losses of $255 million in fiscal 2022, up from $65 million last year, indicating that the first point is becoming a problem.

Overall, the company ended the year with a net loss of $707 million.

But there is good news for patient investors. Shopify aside, Amazon generated $413.8 billion in e-commerce sales over the last four quarters, so with a partner like that in Affirm’s corner, the company has an opportunity to build a level of scale never before achieved in the BNPL space. It may have the best shot of any trader in the industry to eventually become profitable.

Even though that milestone is a long way off, Affirm is attracting customers and merchants so quickly that investors will find it hard to overlook its long-term potential. Its stock is down 86% from its all-time high, and while it’s not something to bet on the firm right now, building a small position with the intention of holding it for the next five to 10 years may well pay off.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Antoine Di Pizio has no position in the stocks mentioned. The Motley Fool holds posts and endorses Affirm Holdings, Inc., Amazon, Apple, Block, Inc., and Shopify. The Motley Fool recommends the following options: January 2023 $1,140 long calls on Shopify, $120 March 2023 long calls on Apple, $1,160 January 2023 short calls on Shopify, and $130 short calls from March 2023 on Apple. The Motley Fool has a disclosure policy.