Affirm Holdings, Inc. (AFRM) operates a digital and mobile-first commerce platform in the United States, Canada, and internationally. The company’s platform provides point-of-sale payment solutions for consumers, merchant commerce solutions, and a consumer-focused app. It has more than 29,000 merchants integrated into its platform.
Fintech companies witnessed a significant surge in demand during the pandemic’s height, driven by growing e-commerce spending, an increased shift from cash to digital payments, and rising interest in cryptocurrency and digital wallets. However, amid the overall market malaise, 2022 has been a rough year for fintech companies, including AFRM.
Buy now, pay later company AFRM has been dealing with several macroeconomic issues, such as rising borrowing costs, declining consumer spending, and growing recession odds. This week, the Fed raised interest rates by 75 basis points and is expected to continue with its hawkish stance until inflation is under control.
Furthermore, analysts have lowered their price targets for AFRM after the company reported the fiscal 2022 fourth-quarter earnings on August 25. Although the company’s revenue increased 39% from the prior-year quarter to $364.10 million, and its gross merchandise volume (GMV) was 77% up year-over-year, it reported a net loss of $186.40 million and a net loss per share of $0.65.
Stephens Inc. analyst Vincent Caintic reiterated an Underweight rating and a price target of $18. The analyst stated, “We think volumes and margins will be constrained further by credit performance. While management expressed long-term bullishness on Affirm, we don't think shares will work as GMV growth decelerates, margins compress, and credit metrics worsen.”
Also, on August 30, Bank of America lowered the price target for AFRM from $45 to $38. Its senior equity research analyst, Jason Kupferberg, expects the company’s GMV growth to slow more in fiscal 2023.
The stock has plunged 54% in price over the past six months and 79% year-to-date to close the last trading session at $20.00. It is currently trading 88.7% below its 52-week high of $176.65, which it hit on November 8, 2021.
Here is what I think could influence AFRM’s performance in the upcoming months:
Deteriorating Financials
For the fiscal 2022 fourth quarter ended June 30, 2022, AFRM’s total revenue increased 39.1% year-over-year to $364.10 million. However, its operating expenses grew 70.6% from the year-ago quarter to $641.36 million. As a result, the company’s adjusted operating loss came in at $29.30 million, compared to an adjusted operating income of $14.20 million in the prior-year quarter.
Furthermore, the company’s net loss and loss per share of $186.40 million and $0.65 widened 51% and 41.3% year-over-year, respectively. Its total liabilities increased 90.1% from the prior-year period to $4.36 billion.
Bleak Growth Prospects
Analysts expect the AFRM’s revenues to increase 33.8% year-over-year to $360.47 million in the fiscal 2023 first quarter (ending September 2022). However, the company is expected to report a loss per share of $0.88 for the ongoing quarter.
Furthermore, the consensus loss per share estimate of $3.20 for fiscal 2023 (ending June 2023) indicates a worsening of 27.4% from the previous year. Also, analysts expect the company’s loss per share to come at $2.48 in fiscal 2024.
Low Profitability
AFRM’s trailing-12-month gross profit margin of 49.09% is 1.7% lower than the 49.94% industry average. The stock’s trailing-12-month EBIT margin of negative 64.11% compares to the industry average of 7.42%. Its trailing-12-month net income margin of negative 52.43% compares to the 4.21% industry average.
In addition, AFRM’s trailing-12-month ROCE, ROTC, and ROTA of negative 27.24%, 9.55%, and 10.14% compare to the industry averages of 7.11%, 3.96%, and 2.74%, respectively. The stock’s trailing-12-month asset turnover ratio of 0.23% is 64.2% lower than the 0.64% industry average.
Frothy Valuations
In terms of forward EV/Sales, AFRM is currently trading at 5.12x, 106.1% higher than the industry average of 2.48x. In addition, the stock’s forward Price/Sales of 3.38x is 38.9% higher than the industry average of 2.43x.
POWR Ratings Reflect Bleak Prospects
AFRM has an overall rating of F, equating to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AFRM has a grade of F for Sentiment, consistent with its weak earnings growth estimates. Also, the stock has an F grade for Stability. The stock’s beta of 3.43 justifies the Stability grade.
AFRM is ranked 77 in the D-rated 80-stock Technology-Services industry.
Beyond what I have stated above, we have also given AFRM grades for Quality, Growth, Value, and Momentum. Get all AFRM ratings here.
Bottom Line
Economic headwinds are expected to hurt the company’s financials. Analysts expect credit metrics and GMV to worsen due to consumer weakness. Furthermore, the stock is currently trading below its 50-day and 200-day moving averages of 27.79 and 42.06, respectively, indicating a downtrend.
Given AFRM’s disappointing financials, bleak growth prospects, elevated valuation, and lower-than-industry profitability, we think investors should avoid the stock now.
How Does Affirm Holdings, Inc. (AFRM) Stack Up Against its Peers?
AFRM has an overall POWR Rating of F. One could also check out these other stocks within the Technology-Services industry with a rating of A (Strong Buy): Jabil Inc. (JBL), Celestica, Inc. (CLS), and Sanmina Corporation (SANM).
AFRM shares fell $0.74 (-3.70%) in premarket trading Friday. Year-to-date, AFRM has declined -80.11%, versus a -20.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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