When you are looking at the stock market today, it’s almost a sure thing that a stock would immediately skyrocket on its first day of debut. Don’t believe me? Look at the recent major initial public offerings (IPOs) such as Snowflake (NYSE: SNOW), Airbnb (NASDAQ: ABNB), DoorDash (NYSE: DASH), and Affirm (NASDAQ: AFRM). Do we see a trend here? And it’s not only those who went through the traditional IPO route that saw such gains. Others who went through the special purpose acquisition companies (SPACs) route saw similar gains, if not more. All in all, it’s safe to say that the new entrants to the stock market have been having a rather good time.
So, what exactly is Affirm and why is the stock in such a huge demand? For the uninitiated, Affirm is a fintech company that offers a buy now, pay later (BNPL) solution for shoppers and retailers. The selling point of this company is that it offers online installment loans through partnerships with merchants. As you may or may not know, the firm is created by Max Levchin, one of the co-founders of PayPal (NASDAQ: PYPL).
Affirm’s IPO followed a pattern that played out repeatedly in late 2020. Investors have been loading up IPO stocks like there is no tomorrow. The stock began trading at roughly 12:20 p.m. EST at $90.90, nearly 86% above the offering price and kept going up. The stock closed 98% higher at $97.24 on Wednesday’s trading session.
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As the Fed continues to maintain the interest rate at such dovish levels in the foreseeable future, you can say that the company picked the right time to go public. With an annual percentage rate for loans at extremely low levels, it poses a lot of opportunity for the company. You see, with even more Americans starting to purchase goods online, the demand for Affirm services is expected to be high.
Of course, with the current unemployment level, many are finding it difficult to make ends meet, let alone purchasing goods. However, with the flexibility that comes with Affirm, consumers no longer need to fork out a full payment immediately. And it is this kind of flexibility that could bring the demand back amid such difficult times. Such an arrangement has played out well for the company.Strong Financial Report Makes AFRM Stock A Safe Bet
From the company’s latest fiscal report ended June 30, 2020, Affirm reported revenue of roughly $509 million. This represents a 92% increase year-over-year, showing the promising growth of the company’s BNPL’s services. And if the revenue growth isn’t good enough to convince you, the company’s prudent financial management lowered its net loss to $113 million. That was a marginal improvement from a loss of $120 million in the prior year. In the quarter ended September 2020, Affirm saw a revenue of $174 million. That represented a growth of 98% year over year. Net loss decreased by about half, from $31 million a year ago to $15 million.More Partnerships Signals More Opportunities
For the company to grow, getting more shoppers and retailers to use its services would be of paramount importance. Among its partners, Shopify (NYSE: SHOP) could be the biggest beneficiary. The two companies forged a partnership in July for online lender Affirm to become the exclusive provider or point-of-sale financing for Shop Pay, Shopify’s checkout service. As part of the deal, Shopify was granted warrants to buy up to 20.3 million shares in Affirm, which equates to roughly 8% of the newly listed company.
Apart from Shopify, Affirm also works with 6,500 other retailers which include Walmart (NYSE: WMT), Wayfair (NYSE: W), and its biggest customer, Peloton Interactive (NASDAQ: PTON), representing 30% of its revenue from its most recent quarter. Of course, the dependence on Peloton could present a risk as well. After all, there is a good chance that fewer people will be buying home exercise bikes after the pandemic. Nevertheless, the inclusion of more merchants could likely more than offset any decline in revenue from Peloton.
The mobile-first payment solution appears to be working towards one goal. That is to be seen as the leader in the space of BNPL. With big names like Khosla Venture and Lightspeed Venture being the major shareholders, it certainly provides a lot of comfort for newer investors. Despite the monstrous rally on its first day as a public company, the stock may not be richly valued yet. Sure, it might make some investors a little bit uncomfortable. That’s understandable as not all fintech IPOs do well.
Still, fintech stocks have been hot leading up to 2020 and there’s a great chance such a trend may continue. Compared to the valuation of PayPal or Square (NYSE: SQ), Affirm’s is relatively minuscule. BNPL is a relatively nascent business, in comparison with credit cards. Admittedly, Affirm is not without rivals, notably Afterpay and Klarna. Even PayPal has gotten into the business in 2020. But this is not a winner takes all market. There is room for multiple players to thrive. As a bonus, as Affirm acquires more customer credit data, it could be a potential acquisition target for bigger financial firms or even tech companies.