Bank of America raises price target for 'bright spot' Affirm

Jason Kupferberg, Bank of America Analyst, discusses why Affirm is considered a 'clear bright spot' in the buy now, pay later space.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. If there has been one trend as of late, it has been the emphasis and enthusiasm around companies in the buy now, pay later space. The potential there to replace an entire generation's use of credit cards, as they increase online purchases. Of course, we've talked a lot about Affirm, and that is the subject of a big price upgrade at Bank of America, where analysts there have pointed out Affirm is a bright spot in what is already a very hot spot in the buy now, pay later world.

And for more on that, happy to bring on the analyst behind the report here. Jason Kupferberg joins us, senior payments analyst at Bank of America Securities, alongside Yahoo Finance's Aarti Swaminathan. And Jason, I mean, when we look at it, you upped your price target here on Affirm from $119 a share to 160 bucks a share. Talk to me about what you like so much. We already know it's a hot space, but why Affirm?

JASON KUPFERBEG: Thanks for having me back today. So a couple of points to make here. First, let me start with the enthusiasm we have around the whole buy now, pay later category. We do think that there's still a big penetration story here to be had. Only about 2% to 3% of the US e-commerce market is currently buy now, pay later. So, lots of room to go there.

And then, within this category, we are particularly bullish on Affirm. We see a number of positive characteristics here. First of all, we believe that they are offering a much broader range of loan products for their merchant customers to offer to their consumers. Second of all, they operate across a much broader range of average order value, average ticket size categories, a broader range of merchant verticals.

And third, they've clearly distinguished themselves as the now, pay later provider of choice among particularly large merchants. Walmart is a customer, Target is a partner. They've recently announced a relationship with Amazon, which will be launching over the next couple of quarters or so, we believe. So they have all those factors going in their favor. We also just had some recent survey work where they fared quite well.

And on top of that, they recently had a really bullish analyst day about two weeks ago, talking about a robust product map here in the coming years. So, for all of those reasons, we did increase the valuation multiple and our price target to a Street high level.

AARTHI SWAMINATHAN: Jason, during an earnings call today with JP Morgan, Jamie Dimon actually called out Affirm and said that when you saw Affirm come out, it's no longer about buy now, pay later. They're going to have a debit card and cash banking account. And this is the interesting one-- we will spend whatever we have to spend to compete with all these folks in our space. So with more traditional banks coming in, do you worry about in terms of market share, just, this entire space getting too crowded and maybe Affirm falling behind?

JASON KUPFERBEG: Well, there are a lot of fintechs that are sort of chasing this space, if you will. You've seen companies like Square and PayPal broaden out their offerings, right, into areas like crypto. For example, PayPal just announced their new digital wallet 2.0. They're going to have a high yield savings account as part of their Venmo platform, offers both a debit card and a credit card. So you are seeing the blurring of the lines increasingly between traditional banks and these fintechs.

And Affirm, to your point, is absolutely moving in that direction as well. They did unveil what they dubbed their super app strategy at this analyst day a couple of weeks ago. So they, too, have a high yield savings account. They are on the verge of introducing what they're calling their debit plus card. They will also have crypto services. They will have rewards programs.

And so, I think the challenge potentially for the traditional banks will simply be pace of innovation. And certainly, they have big balance sheets and lots of dollars to spend. But a lot of these fintechs do have a bit of a headstart.

AKIKO FUJITA: Is there enough demand, do you think, in the market to support all of these services? I mean, to Aarthi's point, you've got names like an Affirm, like a Klarna, and then you've got the more traditional players, who are now jumping in as well. Does this seem like it's all leading towards consolidation?

JASON KUPFERBEG: For sure. I completely agree with that over the medium to long term. I think there does need to be and there will be more consolidation in the BNPL space. We certainly believe that there will be multiple winners, but we don't think there'll be 10 or 12. There will probably be three or four.

And so, in our view, the BNPL providers that are primarily concentrated in what we would call the pay in four part of the market, which is simply 0% APR transactions, four equal installments over six weeks, that's the area of the market that feels to us is kind of getting the most crowded. And Afterpay, obviously, recently decided to sell to Square. And we do think that there will be more consolidation over time. We do think Affirm will certainly be on the short list of long-term winners here in the BNPL space.

ZACK GUZMAN: Yeah, I mean, I guess, when it comes to all this, right, we talk about winners, losers, potential acquisition targets here. But from the consumer perspective, you know, when I try and describe why this is different than a credit card or what really changes for them in purchasing this stuff, it seems very similar. So maybe for the skeptics out there, why is it a game changer?

JASON KUPFERBEG: So it depends on the particular consumer we're talking about. Buy now pay later is not targeted at the affluent consumer who's trying to max out their rewards on a premium credit card. It's really targeted to more of the low to middle part of the demographic spectrum, consumers who either have trouble getting a traditional credit card approved for them, or they've had a traditional credit card in the past, and they've had difficulties managing the product. It's a lot easier to get in trouble as a consumer with a traditional credit card than a buy now, pay later service.

There is deferred interest. There are late fees. It's a more complex product. And so people who need kind of more of almost a budgeting tool from their credit provider, if you will, are really the perfect fit for buy now, pay later. When you look at the most common model, the pay in four model, it's easy to understand. It's four installments over six weeks. There's no interest. And it really does help these consumers from a budgeting perspective because those payments will typically align with their pay period.

So from the perspective of that slice of the consumer base, it really is different than a traditional credit card. And that's where the BNPL service is resonating. Plus a lot of these consumers tend to be younger. And the younger consumers are looking for more tech centric type solutions and certainly the buy now, pay later services fit that mold with their ease of use, given all of the direct merchant integrations that they have with easy to use buttons on websites and apps.

AARTHI SWAMINATHAN: Jason, just very quickly, in your survey, you said 24% of the respondents said they turned to buy now, pay later because they maxed out on their credit cards. Just very quickly, if you can, does this behavior poses a risk to the industry?

JASON KUPFERBEG: I do think it's very important for the buy now, pay later providers to continue to be quite vigilant as it relates to credit decisioning and monitoring delinquency rates. None of these businesses have been sort of fully tested through a traditional down cycle in credit. So, in theory, that is a longer term risk. We believe that these providers have pretty effective algorithms that will help them to avoid any major downside from those risks, but certainly, we are cognisant of that. These are credit intensive products.

ZACK GUZMAN: Jason Kupferberg, senior payments analyst at Bank of America Securities, appreciate you coming on, alongside Yahoo Finance's Aarthi Swaminathan. Appreciate the time.

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