A year ago, there was little holiday cheer at Affirm. The point-of-sale lender was confronting rising interest rates, recession fears and weakening consumer spending. Affirm shares ended 2022 down 90%, wiping out billions of dollars in market value.
Affirm investors are wrapping up 2023 in a much different mood.
The stock skyrocketed 430% in 2023, as of Wednesday’s close, outperforming all other U.S. tech companies valued at $5 billion or more. The next-best performer was Coinbase, which shot up 423% largely because of bitcoin’s rebound.
With the Federal Reserve setting the stage for interest rate cuts in the year ahead and more retailers signing onto Affirm’s buy now, pay later offerings, or BNPL, fear of a doomsday scenario for the company has faded. Shares of Affirm got a big boost in November after the company inked an expanded partnership with Amazon, and BNPL purchases hit an all-time high on Cyber Monday.
“The expectation was the consumer was going to be toast, unemployment was going to pick up and higher interest rates would destroy everything, and the exact opposite has happened on all fronts,” said Tom Hayes, chairman at Great Hill Capital, which doesn’t have a position in the stock. “So that’s why you have a scenario where Affirm can start to perform.”
Created in 2012 by PayPal co-founder Max Levchin, Affirm is competing with companies including Klarna, Block’s Afterpay and Zip in the burgeoning BNPL market. Shoppers who choose to pay with a BNPL service split their purchase into four or more installments typically over a period of three months to a year, without accruing compounding interest. The lenders make money from interest payments and by charging merchants fees to offer their lending services.
Retailers benefit by giving consumers another option for purchasing a skateboard, watch or a gift for a family member, and one that can come with less sticker shock, resulting in fewer abandoned carts.
Affirm’s run-up
Affirm made its public market debut on the Nasdaq in January 2021, as the Covid-19 pandemic was driving a surge in adoption of BNPL services. Shoppers flush with stimulus checks used the small loans when buying clothes, electronics and Peloton exercise bikes, which at one point accounted for 30% of Affirm’s revenue. Online storefronts rushed to add BNPL as an option at checkout.
But by early 2022, Affirm’s share price had fallen more than 60% from its 2021 peak. The rest of the year was just as gloomy as soaring interest rates made it more expensive for Affirm to borrow money to fund installment loans. In February 2023, Affirm cut 19% of its workforce, and executives said macro headwinds and “negative consumer sentiment” would likely persist for the remainder of the fiscal year.
As it turns out, they were overly bearish.
Affirm shares started climbing higher in August after the company’s fiscal fourth-quarter earnings report. The company picked up new merchant deals in sectors beyond retail, such as travel, wireless, ticketing and health care. The stock has more than doubled in the fourth quarter, boosted by an announcement last week that Affirm would offer BNPL loans at Walmart‘s self-checkout kiosks.
Even with their dramatic bounce back, Affirm shares are about 70% below their high in November 2021.
Heading into 2024, BNPL lenders face cooling inflation and an optimistic interest rate environment.
Dan Dolev, managing director at Mizuho Securities, said Affirm is in a strong position to retain users. He pointed to new merchant deals and the expanding market for BNPL offerings in physical stores. Affirm says 16.9 million people have used its services, and the company counts more than 266,000 merchant partners.
Affirm is eyeing international expansion and has launched a debit card that lets customers pay upfront or in installments. Affirm announced at its investor day last month that it plans to introduce a spending account tied to its debit card that will allow for ATM access and direct deposit capability.
“The next year or two years are going to be something very different,” said Dolev, who has a buy rating on Affirm shares. “Now they’ve got the brand, and what are they going to do with it? They’re going to turn it into a full-fledged financial services firm.”
‘David against Goliath’
Hayes sees more cause for skepticism. He said Affirm faces an “uphill battle” competing with entrenched operators such as PayPal and Block, as well as credit card companies such as American Express, Citi and Chase that have jumped into installment loans.
“It’s David against Goliath, and Goliath is going to win,” Hayes said.
Hayes said Affirm is going down a similar path to online lender SoFi, trying to “have a thousand different projects, and say we’re as big as JPMorgan, but at the end of the day, it’s just simply not going to work.”
BNPL lenders also face heightened risk of users failing to make payments on time. A March report by the Consumer Financial Protection Bureau found BNPL users were on average more likely to have higher levels of credit card debt. BNPL borrowers also tend to have lower credit scores, the CFPB said, with an average score in the subprime range of 580 to 669.
The Affirm website home screen is displayed on a laptop in an arranged photograph taken in Little Falls, New Jersey, on Dec. 9, 2020.
Gabby Jones | Bloomberg | Getty Images
An Affirm spokesperson didn’t provide a comment for this story but pointed to past comments from company executives.
“As our network grows, our moats get deeper,” Levchin said at the company’s investor forum in November. “We get more data. We underwrite more transactions. We meet more people.”
Affirm’s defaults remain low by industry standards. Average delinquency rates for peers, such as LendingClub, SoFi, Upstart and OneMain Financial, increased from 5.7% to 6.3% between January and November, while Affirm’s delinquency rate fell from 2.8% to 2.6%, Jefferies analysts wrote in a report last month.
Affirm says it bases loan decisions on a variety of data points in addition to a user’s credit score.
“Our process involves looking at credit report data, but could also involve some Affirm-specific stuff, like what we know about the merchant and the thing they are about to sell you,” Levchin said in a release last year.
As BNPL adoption grows, regulators are keeping a close eye on the space. Last week, three U.S. senators penned a letter to the CFPB urging the agency to monitor the uptick in BNPL usage during the holidays, saying it could leave consumers overextended. The CFPB announced in September 2022 that it would subject BNPL to greater oversight, in line with credit card companies.
Wells Fargo issued a report earlier this month that described BNPL loans as “phantom debt” that may be lulling “consumers into a false security in which many small payments add up to one big problem.” As it stands today, the industry is “not a major problem for consumer spending yet,” Wells Fargo economists Tim Quinlan and Shannon Seery Grein wrote.
Since BNPL loans are not currently reported to major credit reporting agencies, they wrote, there is “no way to know when this phantom debt could create substantial problems for the consumer and the broader economy.”
Chinese tech company Tencent is a gaming giant and the parent company of WeChat, the ubiquitous social messaging app in China.
Cheng Xin | Getty Images News | Getty Images
Chinese social media and gaming company Tencent on Wednesday reported better-than-expected profit in the third quarter, spurred by growth in games, advertising and cloud services.
Tencent reported profit attributable to shareholders of 53.23 billion yuan ($7.37 billion) in the third quarter, compared with a LSEG estimate of 46.18 billion yuan over the period.
The company’s revenue came in at 167.19 billion yuan, short of the 167.82 billion yuan analyst forecast.
The West shouldn’t assume that China is lagging behind the U.S. and Europe on tech developments, Microsoft’s president and vice-chairman warned.
U.S-China tensions in the past few years have centered on the battle between the two nations for tech supremacy, culminating in a slew of export controls on critical technologies. Late last year, China’s Huawei surprised the market with the release of a smartphone whose reviews indicated downloads speeds associated with 5G, sparking speculation of an apparent chip breakthrough that defied U.S. tech sanctions.
Speaking at the Web Summit tech conference in Lisbon, Portugal, on Tuesday, Microsoft’s Brad Smith told CNBC that “in many ways,” China is close to or is even catching up on technology.
“I think one of the dangers, frankly, is that people who don’t go to China too often assume that they’re behind,” he told CNBC’s Karen Tso. “But when you go there, you’re impressed by how much they’re doing.”
He predicted that Chinese and American companies will be competing on technology into the distant future and urged U.S. and European companies to collaborate to grow economies and bring new advancements like artificial intelligence to the rest of the world.
Microsoft CEO Brad Smith participates in a meeting at The Westin Palace Hotel, on 20 May, 2022 in Madrid, Spain.
Cezaro De Luca | Europa Press | Getty Images
Microsoft has operated in China since 1992, according to the company’s web page, including through its largest research and development center outside the U.S. Microsoft CEO Satya Nadella said last year that the firm wasn’t focused on China as a domestic market, but that it provides services to Chinese companies and has a more visible presence locally than do many other U.S. tech giants.
Asked about whether trade and tech transfers — or the movement of data, designs or innovations — with China will get more challenging as Washington transitions between the administrations of U.S. incumbent leader Joe Biden and President-elect Donald Trump, Smith it was too early tor know.
“The truth is, as an American technology company, we can do business in China only when we are offering a service that the Chinese government wants to have there, and the U.S. government wants us to bring there,” he said, adding, “And in some cases they look at, say, a data center to support a Mercedes or a Siemens or a Starbucks or a General Motors — there seems to be a level of comfort. In consumer services, not really.”
He predicted that we’ll live in a world where some technology will move to China, and it won’t be the tech firms that decide.
Vasco Pedro, co-founder and CEO of Unbabel, on the first day of the 2023 Web Summit at the Altice Arena in Lisbon.
Miguel Reis | SOPA | Lightrocket | Getty Images
LISBON — Unbabel on Wednesday announced a translation service powered by artificial intelligence, adding another rival to a highly competitive space — with its CEO warning that humans may not be needed for translation at all in three years.
Widn.AI is Unbabel’s new product and is based on the company’s proprietary large language model (LLM) called Tower. An LLM is an AI model that underpins applications like OpenAI’s ChatGPT.
Unbabel’s LLM allows AI translation in 32 languages, Vasco Pedro, the company’s CEO, told CNBC in an interview at the Web Summit in Lisbon.
“When we started in Unbabel 10 years ago, AI was not at the stage that it is now, and so we were very much focused on creating hybrid solutions that would combine AI and human,” Pedro said.
“But I think for the first time, we believe that translation is now fully in the realm of AI capabilities, and that you can do a lot of things without needing humans at all in the case of translation.”
Unbabel’s traditional product was one that combined so-called machine learning, a type of AI, to translate words, but with human editors to check the final product.
Pedro said Widn.AI will not require humans.
“I think humans still have a slight advantage in very hard use cases. But that advantage right now is so razor thin that except for really the … most difficult use cases, we believe AI is getting really there, and it’s hard for me to see right now how three years from now, you will need humans to be translating anything,” Pedro said.
“There’s still going to be humans responsible for making sure that things get translated and are delivered in the right places,” he added.
Widn.AI is the latest product in an increasingly competitive market which includes Google Translate and products from German startup DeepL.
Those companies see translation as a key area in which LLMs can be used effectively and have trained models specifically to tackle various languages.
Pedro acknowledges that the revenue per translated word is going to “drastically reduce.” But he said there will be an increase in the amount of content translated which will sustain the company’s growth.
Unbabel is speaking to investors and is looking to raise between $20 million and $50 million in funding to fuel the growth and development of Widn.AI, according to Pedro.