Apple Is Delving Into ‘Buy Now Pay Later,’ or BNPL. How to Play It.

Consumers using BNPL can stretch payments for an item over a few weeks or months. A big marketing pitch is 0% interest for a six-week term. BNPL is thriving, with U.S. volume projected to pass $100 billion annually by 2024, up from $55 billion in 2021. So far, the market has been dominated by companies such as

Affirm Holdings

(ticker: AFRM), Klarna, and Afterpay—the last an Australian business that was acquired by

Block

(SQ) this year in a $13.8 billion deal.

Tech giants like Apple (AAPL) are angling in, too, seeing a market in BNPL with plenty of growth ahead. Yet Apple’s entry, while a vote of confidence in the product, also poses more challenges to the financialtechnology companies—particularly Affirm, the largest publicly traded pure play in BNPL.

Moreover, competition is rising as the Federal Reserve raises interest rates and takes other measures to fight inflation. That won’t make it any easier on consumer lenders, and it may only put more pressure on companies like Affirm to hit Wall Street’s targets.

Affirm’s stock is now taking the biggest hit. Trading around $20, the stock has fallen 80% this year, including a 16% decline since Apple announced its BNPL service. Affirm has shed $44 billion of market value since peaking at $50 billion last year.

Some on Wall Street argue that the stock has been punished enough. At a market cap of $6 billion, it could attract buyout offers. But investors are betting that Affirm’s lending practices will hold up in a much tougher macro climate. A better bet may be more-diversified payment stocks, including

PayPal Holdings

(PYPL),

Mastercard

(MA),

Visa

(V), and even Apple.

Affirm sounds unfazed by the brewing storm. Apple’s entry is a “great indicator” of demand for BNPL, Chief Financial Officer Michael Linford said in an interview. Affirm has spent years building a vast merchant and e-commerce network—including deals with Amazon.com (AMZN) and

Shopify

(SHOP). “People are missing the underlying trend,” Linford says. “Consumers are demanding this product.”

Affirm has long claimed that its lending algorithms, which make snap judgments on a consumer’s credit quality, will carry it through a downturn. Delinquencies and charge-offs for bad loans have been rising. But financing costs remain low, with less than 20% of its wholesale funding for loans tied to floating-rate debt—the kind that would quickly adjust higher as the Fed hikes rates.

Affirm also has a cushion to protect margins, with a wide spread between its funding costs and the fees it charges merchants—ranging from 2.5% to 15% of an item’s sale price, depending on the loan’s duration and other factors.

Merchants

pay those rates because BNPL can bring in revenue they wouldn’t otherwise get, the company says. Affirm recently delivered a 4.7% gross margin on revenue, less transaction costs, well above its long-term target of 3% to 4%.

Morgan Stanley analyst James Faucette reiterated a Buy rating and $80 target price after the Apple news broke, arguing Affirm offers a wider variety of BNPL loans and can adjust both its funding costs and merchant fees to manage through higher rates.

Yet high-growth, unprofitable stocks like Affirm aren’t in vogue now. Wall Street expects the company to rack up a total of $1.9 billion in net income losses through 2024, according to consensus estimates. Wedbush analyst David Chiaverini came out with an Underperform rating on the stock this past week, arguing that the company faces a tough path to profitability amid stiffer competition, slowing e-commerce sales, and margin pressure.

Affirm still isn’t cheap compared with rivals like Block—the latter goes for eight times gross profits versus 10 times for Affirm. “I wonder about Affirm’s ability to grow at the same rate in an environment where credit isn’t good,” says MoffettNathanson analyst Eugene Simuni.

Jefferies analyst John Hecht sees Affirm heading down to $15 over the next year. “They’re a market leader that should be a mature business, and they’re not,’’ he says, referring to Affirm’s lack of profits after 10 years in business.

While Affirm could certainly defy the bears, other payment stocks look more compelling. PayPal is down 74% from its 52-week high, recently trading around $80. The company is expected to produce $3.88 in earnings per share this year and $4.81 in 2023. It goes for 17.5 times 2023 estimates, in line with the

S&P 500’s
multiple.

PayPal has exposure to BNPL with its Pay in 4 product. Its app has become a fixture for online shopping, while its Venmo app thrives for peer-to-peer payments. PayPal also aims to become a full-service crypto wallet, including crypto-linked credit cards and transfers to other wallets.

Mizuho analyst Dan Dolev says margins could improve as the company refocuses on its core services; he sees 50% upside in the stock to $120.

Visa and Mastercard have some tailwinds, including a recovery in payments related to cross-border travel. That segment is highly profitable, and while it took a big hit during the pandemic, it is now recovering. Both card networks are beating the S&P 500 this year. Visa trades at 28 times earnings, while Mastercard goes for 33 times, reflecting faster growth.

As for Apple, its BNPL service is part of an initiative to become a full-scale digital wallet or “super app” for payments. The company plans to fund BNPL loans itself, taking on consumer credit risk. Its banking partner,

Goldman Sachs Group

(GS), will also play a role. Apple is already ubiquitous in our lives—in cars, the palms of our hands, and living-room TVs. Turning the iPhone into a payments app may not move the needle for a company with $400 billion in estimated sales and $101 billion in profits this year. But it certainly won’t hurt.

Write to Carleton English at [email protected]