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Economies with a debt-based monetary model are fueled by innovation. One of them is the emergence of buy-now-pay-later (BNPL). It encourages consumption by fragmenting payments into installments so they are more easily managed.

BNPL’s growth is facilitated by e-commerce digitization as it makes online shopping exceedingly accessible and convenient. As such, BNPL’s global market size is heading for a $3.9 trillion target by 2031, from $256.54 billion in 2022, according to Straits Research.

This would put BNPL’s compound annual growth rate (CAGR) at 30.5%, significantly exceeding the e-commerce market CAGR itself at 10% (by 2028). According to PYMNTS data released in September, BNPL became so popular as to be used for grocery shopping, gaining a 55.6% share out of all BNPL orders.

With this new consumer habit and triple outpacing in mind, which stocks are poised to benefit from FinTech’s short-term loan innovation?

Affirm Holdings, Inc. (Nasdaq: AFRM)

When Affirm went public in January 2021, its initial public offering (IPO) price was $49 per share. While AFRM share price has fallen to $31, the largest US BNPL provider has gained 241% year-to-date, exceeding even Nvidia (NVDA).

As of August 2023, Affirm reported 16.5 million active customers, a 30% increase from December 2022. This impressive growth is unsurprising given that Affirm doesn’t charge deferred interest, compound interest, late fees, or penalties. Instead, the company generates revenue through transactions paid by merchants when Affirm executes them. 

To that end, Affirm exclusively partnered with Shopify early on in 2020 to enable Shop Pay installments. This was the major rail for Affirm’s success as the Shopify platform caters to over 500,000 businesses worldwide. Since that partnership, Shopify’s active users have grown by over 200%.

In the latest earnings report from November 8th, Affirm missed the earnings per share (EPS) consensus of $0.08 at reported -$0.57. However, it beat the revenue estimate of $444.48 million at $496.55 million, a 37.3% increase from a year-ago quarter. Despite a net loss of $985.34 million, Affirm is a high-growth stock as mirrored by its large revenue increase.

Based on 17 analyst inputs pulled by Nasdaq, AFRM stock is “hold”, positioning it as presently fairly valued. The average AFRM price target is $21.59 vs current $31. The high estimate is $33, while the low forecast is $12 per share. 

Block (NYSE: SQ)

After absorbing the Australian Afterpay in January 2022 for $29 billion, Jack Dorsey’s Block became known for three things: BNPL, Bitcoin, and CashApp. Like Affirm, Block doesn’t incur interest on payment installments but relies on merchant fees, late fees, and deferred interest (if installments are not repaid in full).

Although not specifically addressing its Afterpay-integrated BNPL revenue, Block reported $5.62 billion total net revenue, a 24% year-over-year growth. Since Block is not a standalone BNPL service provider but has Bitcoin and CashApp to diversify, the company offers a more secure investment exposure.

Block’s CashApp generated $984 million gross profit, up 27% yoy. Bitcoin’s gross profit ran up to $45 million, generating $2.42 billion in revenue. With the hype around Bitcoin ETF approvals and the 4th halving in April 2024, investors should consider Block a hybrid crypto/payments high-growth stock. 

Based on 39 analyst inputs pulled by Nasdaq, SQ stock is a “strong buy.” The average SQ price target is $71.87 vs the current $63. The high estimate is $95, while the low forecast is $46 per share. 

Apple (Nasdaq: AAPL)

For investors interested in even safer BNPL exposure, Apple presents a solid proposition. By the latest 13F filing, Apple makes half of Warren Buffett’s investment portfolio. The tech giant has been probing the FinTech waters for a while, starting with the launch of Apple Pay in 2014.

In March 2023, Apple upgraded Apple Pay with BNPL for up to $1000 without incurring interest or fees, split into four installments. Throughout 2022, Apple Pay processed $6 trillion in payments globally, making it one of the largest FinTech forces. For comparison, PayPal had a total payment volume of only $1.36 trillion (TPV).

However, Apple Pay’s share in the online payments arena is still relatively low, at 12.62% vs PayPal’s 56.15% share. Since its launch, Apple’s BNPL service, known as Apple Pay Later, has shown promise. According to a J.D. Power survey, 19% of BNPL customers used it, while PayPal dominated at 39% BNPL share.

Although Apple’s entry into the buy-now-pay-later will be limited by its ecosystem, it is large. Moreover, Apple can instantly scale it as an established payments brand name. It is also worth noting that Apple didn’t hint at auto-fining customers for “misinformation” as PayPal did. 

Based on 31 analyst inputs pulled by Nasdaq, AAPL stock is a “strong buy.” The average AAPL price target is $201.99 vs the current $190. The high estimate is $240, while the low forecast is $150 per share.

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