Vinod Khosla is a self-made billionaire who helped co-found Sun Microsystems before launching a career as a venture capitalist. Today his Khosla Ventures firm has over 200 portfolio companies spanning consumer, biotechnology, sustainability, enterprise, health, and what it calls frontier technologies, such as AI, robotics, and more.

While Khosla primarily focuses on early-stage and growth companies, it also has investments in some established, publicly-traded companies including Block (NYSE:SQ), DoorDash (NASDAQ:DASH), and Okta (NASDAQ:OKTA).

Khosla Ventures has invested in more than 1,000 companies since its founding in 2004, many of which it has long since exited. However, one investment from over a decade ago that it still owns today is Affirm Holdings (NASDAQ:AFRM), the buy now, pay later (BNPL) fintech specialist. 

Khosla was actually Affirm’s first venture capital investor in 2013 and has maintained a presence throughout its early phase and on to its initial public offering in January, 2021. 

The market, though, has not been kind to the fintech’s stock. Originally offered at $49 per share, AFRM stock goes for just $39 a share three-plus years later. Yet Khosla continues to stand by the company and had, until 2019, a seat on Affirm’s board of directors.

With the stock trading below its IPO value, should investors consider the BNPL stock a buy?

Key Points About This Article:

• Billionaire venture capitalist Vinod Khosla has invested in thousands of companies over the past two decades and owns over 200 today, both a mix of privately-held and public-traded stocks.
• Khosla Ventures was the first VC investor in Affirm Holdings (AFRM) in 2013 and still counts it as part of his portfolio today, but the stock has fallen below its IPO and stands well below its all-time high.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

 A stock for an easy-money environment

Affirm Holdings went public in the middle of the Covid pandemic and benefited from the pent up consumer demand for shopping. “Revenge buying” was a thing and the influx of free money from the government stimulus programs allowed people to spend indiscriminately. Particularly for lower income and younger consumers, the spend now, pay later option was particularly attractive. Affirm’s stock soared, eventually hitting $160 a share.

Yet all that government largesse ignited a firestorm of inflation, which rocketed to its highest level in 40 years. To rein in the runaway price increases, the Federal Reserve ratcheted up interest rates at an unprecedented level over the course of a year. High prices and high interest rates suddenly cut into consumer’s desire to spend and it has been a long slog lower for AFRM stock investors.

Affirm was also popular with merchants as its fees are often less than credit card processor swipe fees and BNPL gives consumers another payment option. Merchants also have the ability to offer their customers 0% short-term financing, an especially attractive option for big-ticket items. It’s why connected fitness firm Peloton Interactive (NASDAQ:PTON) was once Affirm’s biggest customer, accounting for 8% of total revenue in 2022. The post-pandemic cycle wasn’t kind to Peloton either as sales crashed and its business evaporated. It’s no longer mentioned in Affirm’s SEC filings.

But with inflation largely harnessed and the Fed now entering a rate-easing cycle, Affirm Holdings outlook may be more promising. But is it a buy?

Rising risk amid growing consumer debt

Affirm stock has more than doubled this year as inflation eased and chatter increased about rate cuts. Consumers are spending again, too.

Gross merchandise volume was up 31% to $7.2 billion in Affirm’s fiscal fourth quarter, though it continues to produce net losses. While they narrowed significantly to $45 million for the period, for the year they were still a substantial $517 million.

Moreover, delinquencies are growing. Although Affirm saw an increase in the number of loans it made, meaning it is natural to see an increase in delinquencies, but its troubled loans are growing at a much faster rate.

Non-delinquent loans rose 27% to $5.3 billion, but across the board the value of delinquencies rose at much higher rates. Perhaps most worrisome is the value of loans 90 to 119 days delinquent soared 81% from the year ago period, hitting $38.6 million. Affirm charges off the loan after 120 days.

Interest rates on Affirm’s longer-term loans can run between 30% and 36%, a usurious level compared even to credit cards. A customer who willingly accepts a 36% interest rate to make a purchase would seem to be a customer who is a high-risk for default.

Key takeaways

The Federal Reserve is trying to maneuver a soft landing for the economy. It doesn’t want to cripple economic growth, but wants to lower interest rates gradually to not reignite inflation. It could result in a Goldilocks scenario for Affirm Holdings if the central bank is successful. The economy keeps expanding and consumers are still working and spending.

Yet the bill for all the borrowing consumers are doing is coming due. With consumer debt at record levels, people are stretched thin financially, making the immediate future a dicey one.

Affirm Holdings has shown it doesn’t hold up well when there are shocks to the system. So many variables are at play that I’m not comfortable with its chances. It also trades at very elevated valuations still, making AFRM stock a pass for me.

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