Affirm extends rally on Cyber Monday boost as BNPL lending surges

(Reuters) -Shares of Affirm Holdings (NASDAQ:) extended a rally on Tuesday following a rating upgrade and data showing that more price-conscious shoppers turned to buy now, pay later (BNPL) services to fund Cyber Monday purchases.

Record Cyber Monday sales of $12.4 billion, according to Adobe (NASDAQ:) Analytics data, have highlighted the growing role of BNPL providers like Affirm, as well as rivals Paypal, Afterpay, Klarna and Zip, in driving online retail shopping.

U.S. BNPL use hit an all-time high on Cyber Monday, contributing $940 million in online spending, up 42.5% from a year earlier, Adobe Analytics data showed. The number of items per order rose by 11%, according to Adobe, as shoppers used BNPL for increasingly larger carts.

BNPL providers partner with online merchants such as Amazon.com (NASDAQ:), Target and Walmart (NYSE:) to extend loans to customers to cover purchases, which they pay back in installments. Their loans typically charge zero interest, helping to increase dramatically the affordability of online goods, particularly for shoppers who have lower credit scores.

Affirm’s shares were up 7.3% at $31.52 on Tuesday afternoon, a day after closing 12% higher on Cyber Monday and following the Black Friday sales drive. Jefferies analysts on Tuesday upgraded Affirm’s stock to “hold” from “underperform,” citing increased demand for its loans, improved funding market conditions, and better credit performance of its securities. They also raised their price target to $30 from $9.50.

The stock has more than tripled in value this year, buoyed by increased demand for its services from customers faced with higher interest rates and red-hot inflation.

“AFRM is benefiting from the current inflationary/macro pressures consumers are facing as BNPL is now becoming a convenient solution from holiday shopping to gas/groceries,” the Jefferies analysts wrote.

Affirm raises funding from banks, insurance firms and the capital markets to front up loans to customers, and earns a commission from merchants – which can sometimes be as high as 12.5%. While BNPL providers’ most popular four-installment products are typically interest-free, some charge interest on other purchases. While Affirm does not charge late fees, other providers do.

Affirm mostly lends to near-prime and prime borrowers, but has tightened its credit standards this year, the company has said.

DOWNSIDE RISK?

Affirm offloads some of its loans to investors via sales of asset-backed securities, and it has upsized these offerings this year due to increased investor demand. These securities are among the sources of Affirm’s funding for its customer loans, in addition to bank loans and other forward agreements, according to its filings.

Despite booming loans, BNPL margins are thin. According to a CFPB survey of Affirm and the other four major BNPL lenders, unit margins were 1.01% of gross merchandise volume in 2021. Affirm is unprofitable, although its net loss narrowed in the third quarter.

“Consumers are voting with their wallets as they increasingly embrace more transparent and flexible payment options like Affirm. We provide consumers with increased purchasing power, and greater control over managing their finances,” an Affirm spokesperson said on Tuesday.

Affirm’s stock remains at a fraction of the all-time $176.65 high it reached in November 2021 during the pandemic online shopping boom.