Are BNPL Players like Affirm in Dire Straits Over Recession Fears?

As the Fed steps up efforts to combat inflation, some are apprehensive about the U.S. economy falling into a recession. Some investors are worried that buy-now-pay-later (BNPL) providers like Affirm (AFRM) would be hurt if consumer spending takes a dip during an economic slowdown. 

Affirm, Afterpay, Zip, and SoftBank-backed Klarna are among the leading BNPL brands. They provide credit solutions to shoppers at the point of sale. Afterpay is owned by Block (SQ), while Zip is an Australian company. BNPL services often make money by charging merchants a processing fee and charging interest on consumer loans. Another revenue source for some services is late payment fees imposed on borrowers.

Can Affirm Survive a Recession?

BNPL services boomed as COVID-19 stimulus checks and cheap money enabled by low interest rates fueled consumer spending. Investors are starting to question how Affirm and its peers will fare with rising interest rates and reduced spending.

A major concern has been that BNPL borrowers could default on their payments as cash becomes tight. Affirm’s bad debt, defined as payments late by at least 30 days, rose to 3.7% of the outstanding loan value at the end of March, compared to 1.4% in the same period last year.

Affirm stock debuted at $49 apiece in January 2021. It had shot up above $176 by November of that year. However, the stock has since declined more than 86% from that peak. While investors may be cutting exposure to BNPL stocks amid recession fears, Affirm believes it is well-placed to weather the potential storm. 

Unlike many of its competitors, Affirm does not charge late a payment fee, which it says would appeal to consumers during a downturn. Additionally, Affirm does not expect rising interest rates to immediately increase its borrowing costs. Most of the company’s credit funding comes from fixed-rate debt. Affirm’s major partners include Amazon (AMZN) and Shopify (SHOP). It also recently added Stripe to its partner list. 

Wall Street’s Take

The Street is cautiously optimistic about Affirm stock with a Moderate Buy consensus rating, based on seven Buys, six Holds, and two Sells. The average Affirm price forecast of $42.43 implies 62% upside potential to current levels. 

Insider Trading

TipRanks’ Insider Trading Activity tool shows that Insider Confidence Signal is currently Positive for Affirm. Corporate insiders have bought $126.4 million worth of the company’s shares in the past three months.

Key Takeaway for Investors 

Besides Affirm’s no late fee offering, which is potentially appealing to more shoppers in a downturn, the company still has an enormous growth opportunity ahead. Affirm CEO Max Levchin says that BNPL penetration in the U.S. is still in the low single-digits. However, it might be wise to play it cautiously, especially if a recession is around the corner.

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