Affirm Holdings (AFRM) — which was founded in 2012 and came public in early 2021 at $49 per share — is one of the pioneers in the Buy Now, Pay Later (BNPL) space, explains Nate Pile, editor of Nate's Notes.
While there could still be some rough sailing ahead if the economy does take a turn for the worse, I believe the 80% tumble the stock has taken over the past nine months has created a very attractive risk-reward situation for investors.
After keeping my eye on it for a while — especially since Apple (AAPL) announced it was getting into the BNPL game a few months ago — I am now recommending Affirm Holdings as a new buy in our model portfolio.
The fact that Max Levchin is the company’s CEO (and has been since 2014) is one of the primary things that has drawn me to the stock. If you are not familiar with his name, Levchin was one of the co-founders of PayPal (PYPL) back in 1998, and he is someone whom I have only grown more impressed with as time has gone by.
Not only has he emerged as a “thought leader” when it comes to trends in digital finance (among other things), but he is the sort of CEO who is always going to be able to rally those around him to find success regardless of what obstacles they face.
And, speaking of obstacles, I am sure some of you are already wondering why I would be interested in a company that recently learned Apple will be one of its newest competitors going forward. There are a couple of reasons why.
First, the whole BNPL concept is still in its infancy relative to what it will likely become several years down the road, and, consequently, there is still plenty of room for plenty of competitors to find success before things start to get “too crowded.”
Second, while it is true that Apple is a formidable competitor, the fact that Apple is getting into BNPL is a very strong indicator that it sees an opportunity to significantly grow the market, and as it does so, it will likely help grease the skids, so to speak, for everyone else as the market grows and matures.
In the meantime, Affirm has been doing a great job building its client base on both the merchant and consumer side. Of course, the next big test for all of the companies operating in the BNPL space is to see just how bad default rates do (or do not) end up becoming during the economic slowdown that appears to be in the cards.
While there are no guarantees that the approach Affirm has taken with its technology to assess risk when underwriting its loans will prove to be “good enough” to avoid major problems along the way, I believe the risk-reward ratio for the stock is very much skewed to the upside at this point in time.
I am willing to roll the dice by starting a position in the stock as a bet on the growth of BNPL. Affirm is a considered a buy under $26 and a strong buy on any pullbacks under $20.