The "buy now, pay later" boom could mean big returns for investors hoping to cash in on consumer spending. These three stocks could provide exposure using BNPL — if the sector can overcome fears about the fickle consumer.
Matt Caruso, president at Caruso Insights, tells Investor's Business Daily's "Investing with IBD" podcast that "buy now, pay later" companies provide core strengths. And that's attractive to investors. The services change how everyday purchases are made, include built-in barriers to entry. And BNPL targets a wider, untapped market, Caruso says. "The 'buy now, pay later' space has a lot more to it than people believe," said Caruso.
BNPL works by breaking a large payment into equal chunks with no interest attached. That last part sets the scheme apart from more traditional financing tools like credit card debt or financing.
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But these strengths may run into regulation and oversight issues that could harm how the stock is perceived. Buy now, pay later plans are likely to see scrutiny from regulators. That's because customers take on debt without visibility into how much they're accumulating.
And the success of BNPL depends on whether consumers can continue their recent strong spending. In December, spending rose 0.4% on a month over month, seasonally adjusted basis, according to a report from CNBC and the National Retail Federation.
Here are three stocks Caruso says are key to tapping into the BNPL boom.
Affirm Stock's BNPL Strategy Builds Barriers To Entry
Caruso says Affirm's deals with Amazon and Walmart are helping the company build barriers to entry against competitors. Affirm is sewing up major e-commerce players and boosting its visibility with consumers. But Affirm's strength also lies in an experienced C-Suite, particularly its CEO Max Levchin, Caruso says. Caruso cites Levchin's prior experience working as CTO of PayPal and Levchin's aspirations to become the biggest company in payments. "This is one of those serial entrepreneurs who can definitely execute," said Caruso.
Affirm stock is pulling back from a peak in December. Shares soared more than 100% after breaking out from a cup pattern in November.
Block Stock's Merchant Relationship BNPL Advantage
Block stock benefits from an established network of customers and merchants through its beginnings as a mobile payments processor. But Caruso says the return of co-founder Jack Dorsey is likely to refocus Block's efforts to the "buy now, pay later" space.
Block stock's close relationship to merchants means retailers big and small can now entice customers with lower upfront costs without resorting to sales. "If you can simply offer more flexible payment terms, you don't have to obliterate your margins just to move more merchandise," Caruso says.
Block stock is currently ranked 7th in the 37-stock Finance, Credit Card and Payment Processing industry group, according to IBD Research. It currently has a Composite Rating of 85.
Shopify Stock Sets Its Sights On Credit Scores With BNPL
Shopify is a stock that's not yet a big player in the "buy now, pay later" space. But Caruso says this is set to change as the company expands. "The reason you have this flexibility of payments is that they're essentially underwriting a loan for each purchase you make," said Caruso. So with BNPL "you need to have a good credit-scoring capability that has to be done in real time," he added
"That's what I think is going to absolutely beat other payment options," he said.
Shopify stock is trading just below a profit-taking zone, above a November breakout. Shares are also in a buy zone following a rebound from the stock's 10-week moving average. Shopify is currently ranked first in the Computer Software Enterprise industry group, and has a composite rating of 99, according to IBD Research.
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