Apple is embarking on “Buy now, pay later” or BNPL. How to play it.


Many of us are glued to our iPhones. Whether


in its way, the device will become more sticky. The company last week announced a new “tap to pay” feature aimed at enticing consumers to whip out their iPhone, rather than a credit card, for in-store purchases. Apple is also looking into one of the hottest areas of consumer credit, a service called buy now, pay later, or BNPL.

Consumers using BNPL can spread out payments for an item over a few weeks or months. A big marketing argument is 0% interest for a term of six weeks. BNPL is booming, with US volume expected to exceed $100 billion per year by 2024, up from $55 billion in 2021. So far, the market has been dominated by companies such as

Affirm Assets

(symbol: AFRM), Klarna and Afterpay, the latest Australian company acquired by

To block

(SQ) this year in a $13.8 billion deal.

Tech giants like Apple (AAPL) are also getting in on the fun, seeing BNPL as a market with a lot of growth to come. Yet Apple’s entry, while a vote of confidence in the product, also poses more challenges for fintech companies, particularly Affirm, BNPL’s largest publicly traded pure play.

Moreover, competition is intensifying as the Federal Reserve raises interest rates and takes other measures to fight inflation. It won’t make it easier for consumer lenders, and it will only put more pressure on companies like Affirm to meet Wall Street goals.

Affirm’s stock is now the most affected. Trading around $20, the stock has fallen 80% this year, including a 16% drop since Apple announced its BNPL service. Affirm has lost $44 billion in market value since peaking at $50 billion last year.

Some on Wall Street say the action has been punished enough. With a market cap of $6 billion, it could attract buyout offers. But investors are betting Affirm’s lending practices will hold up in a much tougher macroeconomic climate. A better bet may be more diverse payout actions, including

PayPal Credits





(V), and even Apple.

Affirm the unflappable sounds in the face of the brewing storm. Apple’s entry is a “great indicator” of demand for BNPL, chief financial officer Michael Linford said in an interview. Affirm has spent years building an extensive merchant and e-commerce network, including agreements with (AMZN) and


(STORE). “People are missing the underlying trend,” Linford says. “Consumers demand this product.”

Affirm has long claimed that its lending algorithms, which make instant judgments about a consumer’s credit quality, will see them through a downturn. Delinquencies and bad debt write-offs increased. But funding costs remain low, with less than 20% of its wholesale funding for loans tied to variable-rate debt, the kind that would adjust quickly as the Fed raises rates.

Affirm also has a cushion to protect its margins, with a wide spread between its funding costs and the fees charged to merchants, ranging from 2.5% to 15% of an item’s selling price, depending on the term of the loan and other factors.


pay those rates because BNPL can generate revenue they wouldn’t otherwise get, the company says. Affirm recently achieved a gross margin on revenue of 4.7%, less transaction costs, well above its long-term target of 3% to 4%.

Morgan Stanley analyst James Faucette reiterated a buy rating and target price of $80 after the Apple news broke, arguing that Affirm offers a wider variety of BNPL loans and can adjust both its financing costs and its merchant fees to manage higher rates.

Yet high-growth, unprofitable stocks like Affirm are out of fashion these days. Wall Street expects the company to rack up a total of $1.9 billion in lost net revenue through 2024, according to consensus estimates. Wedbush analyst David Chiaverini gave the stock an underperforming rating last week, saying the company faces a tough road to profitability amid increased competition, slowing sales of e-commerce and pressure on margins.

Affirm is still not cheap compared to rivals like Block, the latter goes for eight times the gross profit compared to 10 times for Affirm. “I question Affirm’s ability to grow at the same pace in an environment where credit is not good,” said Eugene Simuni, analyst at MoffettNathanson.

Jefferies analyst John Hecht sees Affirm going down to $15 over the next year. “They’re a market leader that should be a mature company, and they’re not,” he says, referring to Affirm’s lack of profits after 10 years in business.

While Affirm could certainly challenge the bears, other payout actions look more compelling. PayPal is down 74% from its 52-week high, recently trading around $80. The company is expected to generate $3.88 in earnings per share this year and $4.81 in 2023. This is 17.5x 2023 estimates, in line with



PayPal has exposure to BNPL with its Pay in 4 product. Its app has become a go-to for online shopping, while its Venmo app is thriving for peer-to-peer payments. PayPal also aims to become a full-service crypto wallet, including crypto-linked credit cards and transfers to other wallets.

Mizuho analyst Dan Dolev said margins could improve as the company refocuses on core services; he sees a 50% rise in the stock to $120.

Visa and Mastercard have tailwinds, including a resumption of payments related to cross-border travel. This segment is highly profitable and although it was hit hard during the pandemic, it is now recovering. Both chart networks beat the S&P 500 this year. Visa trades at 28 times earnings, while Mastercard trades at 33 times, reflecting faster growth.

As for Apple, its BNPL service is part of a move to become a large-scale digital wallet or “super app” for payments. The company plans to finance the BNPL loans itself, assuming the consumer credit risk. Its banking partner,

Goldman Sachs Group

(GS), will also play a role. Apple is already ubiquitous in our lives – in cars, the palms of our hands, and living room TVs. Turning the iPhone into a payment app may not shake things up for a company with $400 billion in estimated sales and $101 billion in profit this year. But it certainly won’t hurt.

Write to Carleton English at [email protected]


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