Affirm Volumes Soar but Stock Dives as Delinquencies Inch Higher

The buy now, pay later (BNPL) engine may still be firing on most cylinders, but judging by the 15% drubbing Affirm’s stock took after hours Tuesday (Nov. 8), investors are more focused on risks right now than growth. In the case of Affirm specifically, that worry was aimed at the slowdown in Peloton’s sales, a volatile macro backdrop, and an upward trend on delinquencies.

“In light of the current volatile macro-economic environment and the continued and pronounced slowdown with a particular large merchant partner, we are reducing our outlook for FY’23,” executives wrote in their shareholder letter.

That partner is Peloton, of course, now at 2% of GMV, where it had been more than 20% previously. While Peloton works to address its own slowdown and list of problems, its headwinds are spilling over into Affirm’s results.

Wall Street is a game where every percentage point of forward guidance matters. A forecast of $20.5 billion to $21.5 billion in gross merchandise volume fell short of expectations. The implied guidance, management said, is about 30% growth; the previous forecast had been around 40%.

Despite that uncertainty, CEO Max Levchin and CFO Michael Linford stated that the company is still “on time and on pace” to achieve profitability in FY 2024.

The company said in its filings that its 30-day delinquency rates, ex-Pay in 4, were 2.7%, up from 1.5% from the same quarter ending in September last year and up from 0.8% in 2021. Almost right out the gate, analysts on the call asked about delinquencies. While those metrics are still below pre-pandemic levels, the direction has been upward, even as the business has grown on the backs of repeat customers.

“How are you going to manage that?,” asked one analyst.

Levchin countered that, “We’re not just managing credit outcomes,” even as he noted later in the call that the company does expect “some degree of worsening on the credit side of things.”  He noted that the weighted average life of the loans (where every transaction is underwritten) stands at 4.6 months. Affirm has “full  control of transactions,” at times requiring down payments, and that risk management is nimble, in contrast to credit card consolidation or personal loans, whose terms stretch out over years.

“The counterpoint to this is that the demand for BNPL is increasing,” Levchin said.

To that end, the company said GMV was up by 62%, to $4.4 billion, which the company said represented about 2% of all U.S. commerce.

Active consumers grew 69% year over year to 14.7 million, while transactions per active consumer rose 39% YoY. And there’s some evidence that there’s stickiness across the platform, as more than 85% of transactions came from repeat customers.

Supplementals released by the company showed that 78% of transactions were done at the point of sale, while the remaining 22% were done through mobile app and website channels.

Drilling down a bit into the transactions themselves, 18% were Pay in 4, and 64% were interest-bearing.

Affirm’s earnings materials also offered up details on product mix, as general merchandise, the largest category at 29% of volume, soared by 509%. That growth rate, according to commentary, “picks up” the contributions of merchants such as Amazon, Walmart and Target. Travel and ticketing grew by 90%. Approval rates were roughly flat in the quarter and have been flat throughout the year.

There’s room for increased adoption of BNPL, management said on the call.  Levchin told analysts that consumers, even those in higher income brackets, are “not done” spending stimulus savings, but they’re getting close — and those savings will be exhausted by the middle of next year. They’ll look to turn to debt, he said, “and we believe, pretty firmly, that we represent the best alternative out there.”

The regulatory landscape also came up on the call, and management stated that the company’s roadmap has not changed even in the face of increased scrutiny from the U.S. Consumer Financial Protection Bureau (CFPB). “We’re the only ones that don’t charge late fees,” Levchin said, “and don’t have all the sorts of other shenanigans that regulators dislike.” Affirm has also, he said, been working with credit reporting agencies to help consumers build their credit histories.

Amid the volatility, Levchin said, “We’re building deep connections with consumers and merchants who need us now more than ever before. Both sides of our network are navigating economic uncertainty.”