Shares of “buy now, pay later” provider Affirm plunged more than 20 per cent on Thursday after it revealed a steeper-than-expected loss driven by soaring costs for marketing and wages to fuel growth in the nascent sector.
The stock price began its steep decline before the market close, when the company accidentally posted partial financial results to Twitter ahead of its scheduled quarterly earnings release.
Buy now, pay later, a new version of the customer instalment plan, has soared in popularity during the coronavirus pandemic. Affirm, one of the largest players in the US market, said it more than doubled its active customer base to 11.2mn in the past year, while the number of its merchant partners increased 20-fold.
Affirm’s revenue jumped 77 per cent to $361mn, but its quarterly net losses widened to $160mn, or 57 cents a share, from $27mn, or 38 cents a share, the year earlier. Analysts polled by FactSet had forecast a loss of 32 cents per share on revenue of $329mn.
The company’s operating costs more than doubled to $557mn in the quarter, driven by big increases in sales, marketing and general and administrative expenses as it doubled its headcount and spent more on advertising.
The most common business model for the product relies on charging merchants a percentage of transaction values for the promise of higher sales associated with more flexible payment methods. But mounting competition from other fintechs, as well as incumbent finance companies getting into the market, has put pressure on such companies to seek out other streams of revenue.
Diversifying revenue is of particular importance to Affirm, which once received a third of its revenue from a single merchant that is in turmoil over weakening sales — home exercise company Peloton. This year, Peloton is likely to account for less than 10 per cent of revenue, said James Faucette, analyst at Morgan Stanley.
“Most of what we are doing is trying to strengthen our consumer brand given the moment of opportunity that we are in,” said Michael Linford, Affirm chief financial officer, in an interview. “The direct-to-consumer product we think is a great way to engage users without having to be reliant on just merchant relationships.”
About 35 per cent of revenue came from merchant fees in the most recent quarter, down from 49 per cent a year ago as fees earned from its direct-to-consumer products more than doubled.
Appealing directly to consumers is becoming more important as retailers increasingly offer more than one buy now, pay later option at checkout, Morgan Stanley’s Faucette said. He added that younger consumers, who tend to use BNPL services in greater numbers, represented an opportunity for cross-selling in the future as they build up banking relationships.
“The big opportunity for Affirm is that they take advantage of their relationships with merchants and then go out and win these consumers as they’re just entering into the early stages of their economic life cycles,” Faucette said.
Recruiting merchant partners will continue to be an important part of Affirm’s strategy, Linford said. Active merchants on its platform jumped to 168,000 from 8,000 a year earlier.
“When you grow both sides of the network . . . you see this explosion in transaction counts, and we think that’s the recipe,” Linford said.
