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Buy now pay later stocks are having an undeniable moment, but analysts are divided on whether it will last. Questions remain as to whether this is the beginning of a permanent change in consumer behavior or a fleeting uptick. For now, however, recent numbers have shown growing consumer acceptance of the financing service that lets consumers split large purchases into smaller payments without interest charges. In the week heading into Black Friday , the day after Thanksgiving, the number of online purchases involving a buy now, pay later service rose 72% from the same period last year, Adobe Analytics said. Use of the installment plans hit an all-time high on Cyber Monday, the Monday after Thanksgiving. Sales using BNPL reached $8.3 billion from Nov. 1-27, Adobe said. That newfound optimism helped drive Affirm Holdings to a 20-month high on Wednesday. Affirm has almost doubled in the fourth quarter, bringing the full-year advance to more than 300%. That’s a reversal from 2022, when Affirm collapsed more than 90% after going public in 2021. Block Inc., which owns the Square service, is up 55% in the fourth quarter. It plunged 61% in 2022. Despite the recent enthusiasm, it’s too soon to label the rise of buy-now-pay-later stocks the beginning of a new boom, according to Jefferies analyst John Hect. “It’s too early, but I totally understand the stock movement because it’s an unwinding of risk factors,” Hect told CNBC. “Credit is stabilizing, but I could argue that credit could get worse from here.” Looming challenges include a still-concerning consumer credit backdrop coupled with higher delinquency rates and a resumption of student loan payments. Offsetting those headwinds is the outlook for lower interest rates in 2024, which would improve those trends. Stocks in the sector Analyst sentiment on Affirm stock is mixed. The majority of analysts polled by FactSet maintain a hold rating on the stock, while less than a third rate the shares a buy. Affirm on Wednesday is selling for 72% more than the average analyst price target of about $23 a share. After seeing the strong Black Friday results, Hect upgraded Affirm to hold from underperform on Nov. 28. Mizuho Securities analyst Dan Dolev raised his target price on Affirm to $30 per share from $24 in a Nov. 15 note and reiterated a buy rating. Still, that price target is 24% below where Affirm was recently selling. “Like Tesla’s beginning, AFRM currently enjoys a small penetration of a massive” total addressable market, Dolev said, noting that its $20 billion of gross merchandise value is dwarfed by more than $10 trillion of in-person, e-commerce, business-to-business and other expansion opportunities. Dolev also touted Affirms’s “rapid product innovation & adoption like the Affirm Card and transactional accounts, and a clear plan to more than doubling GMV over the medium-term.” AFRM YTD mountain Affirm stock from the start of the year. Other heavyweights in the space include Block , co-founded by chief executive officer Jack Dorsey, which operates Afterpay. Analysts are more bullish on Block, with 73% of those polled by FactSet rating it a buy. Average analyst price targets imply about 10% upside from Tuesday’s close. Buy now, pay later services are “a net tailwind for Block, given that GMV growth accelerated sequentially from 2Q23 to 3Q23 (+20% Y/Y to +24% Y/Y) and may do so again in 4Q23 on the back of strong BNPL trends,” Susquehanna Financial Group analyst James Friedman wrote in a note on Monday. He reiterated a buy rating and $100 per share price target, implying about 45% upside from current levels. SQ YTD mountain Block operates BNPL service Afterpay. The largest player in the space is privately-held Klarna, which leads the field in terms of gross merchandise value, Friedman said. The key industry metric measures the value of transactions on a platform. Hect attributed the rise of stocks like Affirm over the past month to a shift in macroeconomic conditions. The sector had been pressured by expectations that credit quality would deteriorate and the cost of capital was rising as the Federal Reserve hiked interest rates, he said. And while the overall consumer credit picture and delinquencies remain mixed, any marginal improvement is enough to support the uptick in buy now, pay later stocks in the near term, Hect said. “The trajectory of credit seems to be stabilizing,” Hect said. “It’s not great [yet], but any time there’s any period of stability, it’s better than instability.” U.S. households are taking on more debt, according the New York Fed’s Quarterly Report on Household Debt and Credit. For now, most are paying their bills on time, with the number of total balances that are delinquent 90 days or more near all-time lows, according to Bank of America economist Shruti Mishra. However, the latest New York Federal Reserve’s quarterly report showed that the total share of household debt payments that are up to date fell slightly to 97%, marking the third-straight quarter of declines. And there was a jump in payments that were seriously delinquent (90+ days late) in the third quarter. “[D]espite the overall strength in consumer balance sheets and other measures of household debt, the rise in delinquencies is a worrying trend and something to watch out for,” Mishra wrote in a Nov. 9 note. “It remains to be seen whether consumer credit metrics will simply stabilize around pre-pandemic trends or continue climbing.” Financing the holidays Hect said consumers are always on the lookout for the next line of credit available to them, which has helped make buy new, pay later services appealing this holiday shopping season. “BNPL can make it easier for consumers to make larger purchases, which can lead to increased spending especially as access to traditional consumer credit has gotten more difficult and become more expensive,” Wells Fargo senior economist Tim Quinlan wrote in a Monday note. “This is particularly impactful in terms of making expensive purchases more affordable by breaking them down into smaller payments, which can be helpful for consumers who are on a budget.” On Cyber Monday, consumers were using these installment payments to finance increasingly larger carts, Adobe said, noting an 11% year over year increase in the number of items per order. Susquehanna’s Friedman highlighted data from PYMNTS earlier in 2023 that showed a growing share of the millennial and Gen Z consumers are leaning on BNPL as a spending option, although the overall adoption rate remains low. He noted that the increase still suggests “some potential substitution for credit.” Pressure from student loans The resumption of student loan repayments remains a looming headwind, Hect said, as consumers will have to account for an additional monthly payment in their budgets. “It’s going to take time for this to manifest itself, but there’s going to be a modest amount of pressure across the board as people have to apply excess cash flow to student loan repayments,” he said. Buy now, pay later services remain a small sliver of overall consumer spending and the real risks tied to the sector are more closely tied to fundamentals, according to Bank of America senior U.S. economist Aditya Bhave. “Broadly these trends around delinquencies, as economists, we attribute these trends more to fundamentals than to some change in consumer behavior,” Bhave said. “I wouldn’t think of it as people becoming irresponsible or making bad decisions. If you do get a pick-up in consumer delinquencies, it’s probably a function of the labor market slowing down [and] elevated inflation.” Bhave added that he expects total delinquencies to keep increasing. “Our sense after surveying what limited data are available is that BNPL is not a major problem for consumer spending yet,” Quinlan said. “But until there is a definitive measure for it, there is no way to know when this phantom debt could create substantial problems for the consumer and the broader economy.”
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