One popular retail trend recently has been the buy now, pay later (BNPL) option, which is changing up how companies and consumers, view credit. Among the top players in this industry is Affirm Holdings, and it has seen big revenue growth ever since it took the company public in early 2021. It is also just getting started.

Here is why Affirm is a growth stock to think about for the long term.

A leader in buy now, pay later

Affirm’s app lets users pay for their items they purchase from participating businesses in payments. It instantly assesses each person’s credit and rejects or approves a specific purchase via BPNL in seconds. If you are approved, Affirm provides various fixed-installment payment options that are based on cost and any interest that’s charged.

Affirm does not always charge interest on Buy now pay later purchases but when it does charge interest, that cost is put into the fixed payments upfront, providing users a better understanding of what their total purchase cost is. Affirm’s service could be used for both in-person and online transactions, and it has been put into the payment systems of a lot of major retailers, including Amazon, Shopify, Walmart, as well as over 2,000 retail partners. The company charges neither late fees nor yearly fees.

Affirm produces its revenue by charging merchants fees for every transaction, as well as by charging interest.

Founded in 2012, the company went public in Jan. 2021 at about $90 a share, and ever since, the stock has had a roller coaster ride. Its price reached as high as $176.65 a share in Nov., only to fall about 54% the following two months. As of this Tuesday, it was trading under its IPO price at about $81 a share. On January 3, it dropped about 10% in a sell-off and is now down about 14% year-to-date.

Explosive growth

Investors should not be too worried about that swoon. In fact, the price decrease makes it a great time to purchase the stock. The earnings growth for Affirm continue to be great, and the company has strong tailwinds that should drive its stock higher in the future.

In its first quarter, which ended September 30, the company produced $269.4 million in earnings, up 55% year over year, with around $112 million coming directly from fees and $117 million coming from interest. Gross merchandise volume increased 84% to $2.7 billion while its active users rose 124% to 8.7 million. The number of its active merchants soared from 6,500 to over 102,000, which was in large part to Shopify adding Affirm to its platform. Affirm is still operating with net losses, though, as its operating costs have been rising due to expenses associated with acquisitions as well as other investments in marketing, technology and overall operations.

Overall, BNPL is an industry that is destined to take off. Around 55% of Americans have used the buy now pay later option, up from 37% in 2020.

With its current fall in valuation, the price-to-sales ratio has come decreased to about 22, which is about 50% of what it once was when it spiked over 40 in oct. and Nov. This stock might continue to see short-term volatility, specifically with the CFPB inquiry right around the corner, but long-term, as one of the leaders in the industry, is in an excellent position to ride the BNPL wave.

Author: Scott Dowdy

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