Black Friday’s Big Winner Might Be a Loser - InvestingChannel

Black Friday’s Big Winner Might Be a Loser

Proprietary Data Insights

Top Credit Services Stock Searches This Month

Rank Name Searches
#1 Visa 130,731
#2 PayPal 117,674
#3 Affirm 49,947
#4 Mastercard 41,727
#5 Ally Financial 19,161


Even though search interest dropped 30% week over week in Trackstar, our proprietary sentiment indicator, Affirm (AFRM) still plays with the big boys among credit services stocks. The BNPL (buy now, pay later) provider is getting even more looks from investors than massive Mastercard (MA)

As Wall Street and Main Street digest the BNPL numbers from this past holiday weekend, we expect Affirm to resurge in Trackstar

In a second, The Juice relays some of this scary BNPL data and considers if it makes AFRM stock a buy. But first…

As we scoured Trackstar for other ideas, we noticed a wicked 205% surge in search interest for Best Buy (BBY). Makes sense given that Best Buy beat Q3 earnings expectations early last week and reaffirmed its holiday outlook despite inflation. But that was last week. Why does search interest persist?

Probably because Best Buy might have crushed it over the weekend:

  • Among the hottest products over the holiday shopping weekend: digital cameras, smartphones, Xboxes, drones, and MacBooks. 
  • Online sales for smart home items and audio equipment skyrocketed 200% on Black Friday relative to the typical day in October. 

Best Buy’s gotta be getting a piece of this pie. 

Consumers had been holding out for steep discounts, which they’re getting. 

Source: Adobe Analytics 

By the time Cyber Monday rolled around, the average discount on electronics approached 25%. 

And it turns out consumers aren’t only looking for deals. They might be looking to break up the cost of items into several payments. 

Good for Best Buy. Might not be all that great for Affirm…

Retail Investing

Black Friday’s Big Winner Might Be a Loser

Key Takeaways:

  • The Juice’s simple strategy for investing in stocks tied to retail and the consumer economy is to buy ones shielded from debt liability. 
  • This strategy favors names such as Best Buy and Visa (V), but frowns on speculative names such as Affirm. 
  • Data from all angles supports this approach. 

Let’s piece this together step by step. 

The Big Picture

As The Juice noted last week, credit card debt keeps getting worse. 

It’s up 15% year over year, the highest annual increase in more than 20 years. And it’s hitting low-income borrowers and 18- to 39-year-olds the hardest. These groups tend to carry more debt on average, and their delinquency rates are rising the fastest. 

Add in the nation’s 3.1% personal savings rate, close to all-time lows, and there’s clearly trouble brewing among at least the most cash-strapped households. 

The Rise of BNPL

The use of buy now, pay later plans is hitting absurd heights, with some users hitting up BNPL for relatively small items, such as groceries and dining out. As The Juice noted in September

  • BNPL company Zip has experienced 95% growth in grocery purchases. More than half of the items Zip users finance are in the grocery or household category. 
  • Another BNPL player, Zilch, says groceries and dining out account for 38% of its transactions. 

Over Black Friday and this past holiday shopping weekend, this worrisome trend appears to be continuing: 

  • Between November 18 and 25, BNPL orders rose 78% compared to the previous week. 
  • 48% of consumers said they planned to use credit cards on Black Friday. 37% said they’d likely use BNPL. 
  • BNPL users’ average order amount in dollars fell over the weekend. 

That last datapoint is the most important. It tells us that not only are consumers financing holiday shopping purchases, they’re not financing just big-ticket items. This jibes with the revelation that some people are BNPLing necessities and meals away from home. 

Good News, Bad News for Affirm

BNPL loans from Affirm that are 120 or more days late increased to $228 million as of the end of the company’s fiscal year in June. That’s 3.5x higher than the year before. 

Other BNPL lenders report similar issues with consumers not paying back loans. 

The problem: Companies such as Affirm underwrite these loans. While increasing uptake of BNPL is great, when consumers go delinquent, it’s a massive and growing liability for Affirm. A company that doesn’t have the war chest and consumer deposits of, say, a big bank.

The Move for Investors

Stay away from Affirm. If the most inflation-impacted consumers are struggling so much under mounting credit card debt that they’re turning to BNPL for smaller purchases, expect the debt and delinquency levels to keep rising. 

If you’re going to invest in stocks that depend on consumer/retail spending, buy the ones shielded from this liability. Big names such as Visa that make money when consumers swipe debit and credit cards, but are insulated from any repayment issues that follow. 

And even Best Buy. It appears the company will have a solid holiday season after all on the backs of struggling consumers turning to credit and more well-off consumers spending as if there’s nothing wrong with the economy. 

The Bottom Line: As we piece together consumer spending and debt stories, it’s clear we have a problem. In our view, the problem is bigger for the companies with the most exposure to consumers trying to make ends meet and do some discretionary and/or holiday shopping. 

This takes Affirm off the shopping list for investors, even as a long-term play. Its business model simply doesn’t work if the people struggling most with money are among Affirm’s biggest customers. Something’s gotta give, if it’s not giving already. 

Meanwhile, companies such as Visa and Best Buy benefit from this near-term trend and well-heeled households not meaningfully impacted by inflation with plenty of cash on hand to spend and spend freely. 

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