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Now is a great time to buy Affirm Holdings

The market has been somewhat volatile in recent weeks, with major indices having a month of declines in November, with the trend continuing into early December. Some stocks have been hit harder than others during this recent slump. But the slowdown is creating buying opportunities among good companies that have been caught in the ups and downs.

Affirm Assets ( AFRM -6.95% ) is an example.

This fintech fell from a peak of $168 per share in early November to its current price of around $100 per share, a decline of around 40%. Here’s why this makes it a good time to consider this stock.

Image source: Getty Images.

An alternative to credit cards

Affirm Holdings is a buy now, pay later (BNPL) company offering services considered an alternative to traditional credit cards. You buy something from one of its retail partners (walmart, example) via the Affirm app, in-store or online. The app instantly assesses your credit and approves or rejects the application. If approved, you pay a fixed monthly cost with options on how long you want to take to repay the purchase. The purchase is made through a loan from one of its banking partners. For some purchases, the monthly payment will include interest, but it is determined and set in advance and is part of your total payment and will not change. For other purchases, there is no assessed interest. There are also no late fees or annual fees. Affirm makes money from fees paid by merchants or from interest on certain items.

The BNPL service is generating strong interest among young adults, as around 41% of millennials are using it (double the usage of two years ago), while 36% of Gen Z are using it (six times more than in 2019), according to a report. of business management consultant Cornerstone Advisors. CEO Max Levchin has called BNPL’s growing popularity a function of the “great credit card unbundling” as millennials, who came of age after the financial crisis, are reluctant to rack up credit card debt. In 2021, an estimated $100 billion will be spent using BNPL’s services, up from $24 billion in 2020.

Affirm is one of the largest of these BNPL companies, and many other banks and payment companies have jumped on the BNPL bandwagon, including PayPal, Square, MasterCardand Goldman Sachs. Affirm has been around since 2012 but went public in January 2021 – and its share price has taken off, fueled by huge revenue gains.

In its fiscal first quarter ended Sept. 30, revenue grew 55% year-over-year to $269 million, driven by an 84% increase in gross merchandise volume (GMV), a considerable increase in the number of active merchants due to its adoption on Shopifyand a 124% increase in the number of active customers to 8.7 million. Additionally, in November, he expanded his relationship with Amazon so it’s available on all purchases over $50.

The company also raised its revenue estimate for the second fiscal quarter to $330 million from $320 million, and for the full year to $1.25 billion from $1.22 billion.

Why the decline?

After such a strong quarter and massive growth, why has Affirm’s share price fallen so hard? There are a few factors at play here. For starters, the stock had become overvalued, as its selling price (P/S) had more than doubled from about 20 at the end of the June 30 quarter to nearly 45 at the start of November. That means investors were jumping on board, ready to pay more per dollar of annual sales.

But that changed quickly due to concerns about the omicron variant of the coronavirus and rising inflation. Concerns about omicron related to whether or not it would lead to lockdowns or restrictions, which would hurt the economy and reduce lending and spending. At this time, we don’t know the impacts of omicron, but it doesn’t look like any shutdowns are likely, as President Joe Biden has said he will be countered with vaccinations, not shutdowns.

Long-term inflation concerns were raised when Federal Reserve Chairman Jerome Powell told Congress that inflation may not be as “transitional” as first believed and that above-average rates could remain for some time, at least until 2022. This, in turn, could lead to interest rate hikes, as higher rates tend to slow down the economy, but to lower inflation.

It could also reduce consumer spending. However, a higher interest rate scenario could favor BNPL companies like Affirm, as they do not charge interest or have lower embedded interest payments, and this may prove to be a preferable option for many consumers than to pay higher interest rates on credit. cards.

So, the good news for investors is that with the decline in the share price, Affirm’s P/S ratio has returned to around 28, which is closer to its historical range. The other good news is that BNPL is not going away, in fact, a recent study indicated that its revenue will increase more than six times by 2025 to reach $685 billion, at an annual growth rate composed of 13%.

Overall, Affirm’s recent volatility appears short-term in nature. Its long-term prospects look good as it continues to add retailers and customers and is at the forefront of a booming industry. The recent decline in price and valuation makes this a good time to consider adding this stock to your portfolio.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.