What happened
Shares of Affirm Holdings (NASDAQ: AFRM) were taking a dive in January, tracking with a broader sell-off in high-priced growth stocks and payments stocks. There was no company-specific news out on the buy now, pay later (BNPL) specialist, but fears over rising interest rates and inflation seemed to push it lower.
According to data from S&P Global Market Intelligence, Affirm stock fell 36% last month. As you can see from the chart below, the stock fell steadily over the course of the month before a recovery at the end of January.
So what
Shares fell sharply in early January as investors reacted to the Fed's plan to raise interest rates, with Chair Jerome Powell signaling there may be as many as three rate hikes this year. Affirm stock fell 21% over the first three days of January, and continued to slide as investors adjusted their portfolio and analysts lowered their price targets to reflect declining valuations in the fintech sector .
Image source: Affirm.
Affirm is impacted by rising interest rates for two reasons. First, a higher interest rate environment tends to compress valuations on growth stocks as it makes their long-dated earnings worth less. It also gives investors better options for income now as bond yields rise.
There's another factor affecting BNPL companies like Affirm. Because the company makes money charging its customers interest, rising rates will force it to raise its own interest rates. While that may sound like a good thing, it could also force more customers into default, which the company acknowledges as risk. Investors may be especially wary of that as the BNPL model has yet to go through a full credit cycle, and the industry largely emerged after the financial crisis.
The company also points out that rising interest rates could squeeze its net interest margins as some of its funding comes from variable-rate loans.
Now what
Affirm has been highly volatile since its initial public offering (IPO) roughly a year ago, ranging from less than $50 to more than $175, and that range seems to reflect the uncertainty around BNPL. The industry carries big promises, threatening to disrupt the credit card industry, and it has resonated with both consumers and retailers since Affirm landed Amazon as a merchant partner a few months ago.
Still, the company is unprofitable, and the model has yet to be fully tested. We'll learn more when Affirm reports fourth-quarter earnings on Feb. 10, according to Wall Street Horizon. Look out for comments on the Amazon partnership and the expected impact of higher interest rates.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns Amazon. The Motley Fool owns and recommends Affirm Holdings, Inc. and Amazon. The Motley Fool has a disclosure policy.
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