With soaring interest rates, inflation and living costs, consumer spending is set to dip, meaning key players like Affirm, Klarna and Apple that offer ‘buy now, pay later’ services may suffer financially.
‘Buy now, pay later’ (BNPL) has been a growing trend in recent years for online shoppers. However, soaring interest rates and reduced spending amid the global cost of living crisis means leading BNPL firms such as Affirm [AFRM] and even Apple [AAPL] — which only recently entered the market — could see their share prices suffer. Klarna, another major name in BNPL, has intentions to IPO in the near future, which could be impacted by rising competition and ongoing difficulties in the space.
Nevertheless, BNPL — which offers plans that divide payments into manageable instalments over an extended period— has expanded rapidly in recent years. The volume of transactions reached $120bn in 2021, compared with $33bn in 2019, according to GlobalData. Companies have been eager to offer the service. Earlier this year, Block [SQ] acquired BNPL company Afterpay. In May, it integrated the feature into its systems to allow for in-person transactions, as well as online.
But the theme may stall, as stretched shoppers grow wary of accumulating debt. Fashion sellers like Asos [ASOS] partially use BNPL to encourage sales, but people are buying less and, significantly, returning more purchases.
Affirm shares hit by Apple’s rival offering
San Francisco-based Affirm was the original BNPL disruptor to traditional credit card models and remains the market leader in the US. While it specialises in BNPL, it is branching out into other products. Its SuperApp lets customers track their purchasing patterns and give sellers access to data analytics.
However, Apple’s Pay Later is heating up the competition in the space. Apple launched its BNPL function on 6 June. That same day, Affirm’s stock price took a 7.6% hit. The stock has crashed 80.8% year-to-date as of 22 June.
Despite this, founder CEO and Founder Max Levchin told Yahoo Finance Live on 10 June he wasn’t sweating. “BNPL as a category is so underpenetrated in the US, and you could argue worldwide that there's just a lot of room for growth available to everyone.” He pointed out that they had previously survived PayPal’s [PYPL] entrance into the market.
“Even as more players join the movement we started, the prize remains massive, and Affirm is well-positioned to win,” a company spokesperson said.
CNN Money has 18 analysts offering 12-month price forecasts for Affirm’s stock, with a consensus ‘buy’ rating and a median target of $35, representing an 81.6% upside on the 22 June closing price.
Klarna IPO set to debut in 2022
Swedish fintech company Klarna has seen its valuation hugely reduced from $45.6bn in June 2021 down to £30bn, as it seeks new funding. The firm, which is backed by Japanese multinational SoftBank [9984.T], has been forced to lay off 10% of its staff.
In May, SoftBank posted losses of more than $13bn, due to the decline in value of some of its tech-related investments. Klarna has around 150 million active consumers, and it processes 2 million transactions a day from around 400,000 merchants.
However, despite seeing healthy customer figures, in February Klarna announced operating losses of $748m for full-year 2021, compared with $150m the previous year. The company said this was a result of moving into new markets and underwriting an influx of fresh users.
The company is privately listed but has stated intentions to IPO in 2022, with an estimated value of up to $60bn. TechCrunch has reported previously that it’s Europe’s most highly valued private fintech firm.
CEO and co-founder Sebastian Siemiatkowski recently told The Times that its losses were almost one-third below credit card industry standards. However, Klarna will likely be hit by Apple’s entry to the market and the cost of living crisis, which might affect its IPO plans and valuation.
Apple enters the BNPL space
Apple’s move into BNPL has undoubtedly rocked its competitors. “[The] move into BNPL suddenly makes Apple the most accepted BNPL product out there,” said Vincent Caintic, an analyst at Stephens Institutional Equity Research, wrote in a research note on 7 June.
Caintic added that Apple had an advantage over other companies because its Apple Pay service was used by more than 80% of US-based merchants.
“Apple’s latest BNPL offering competes with their products directly, adding to the gloomy outlook that BNPL firms will struggle to survive the cost-of-living crisis,” said Kunal Sawhney, CEO at Kalkine Group.
Apple’s stock is down 23.6% year-to-date through to 22 June. Since the start of the month, it has fallen 8.9%, suggesting its BNPL plans have done little to protect it from the effects of the broader tech selloff in 2022.
Even a big name like Apple is unlikely to escape the economic situation unscathed. Last week Deutsche Bank analyst Sidney Ho cut his price target on the stock to from $200 to $175 amid spending concerns. However, he retained an overall ‘buy’ rating. Of 43 analysts at CNN Money offering coverage on the stock, 27 rate Apple a ‘buy’, with zero ‘sell’ ratings.