Affirm stock (AFRM) rose over 28% last Friday, Aug. 25, as markets gave a thumbs-up to the fintech firm's fiscal fourth-quarter earnings. After last week’s spike, the stock is up a cool 80% for the year - but AFRM is still way below the all-time high of $168.52 set in November 2021 as investors poured money into growth stocks, expecting the rally to continue.
Affirm went public in January 2021, and priced the IPO considerably above its pricing range at $49. It's worthwhile to note that the company had previously delayed its IPO in 2020 as both DoorDash (DASH) and Airbnb (ABNB) soared on their initial listings, and Affirm apparently did not want to leave too much on the table for its own IPO investors.
Affirm Stock Trades at a Fraction of 2021 Highs
As things turned out, even the delayed IPO and bumped-up pricing did not deter early AFRM bulls, as the stock gained 90% on the listing.
However, growth stocks like AFRM tumbled in 2022, as the Fed embarked on one of its most aggressive policy-tightening campaigns in decades, and has now raised its benchmark lending rate to 5.25%-5.50%.
Why Has AFRM Stock Plunged?
The Fed’s rate hikes have worked to the detriment of Affirm for three main reasons.
First, the valuations of growth stocks have taken a hit amid increased interest rates. Second, since Affirm is a buy-now-pay-later (BNPL) company, its cost of funds has also risen as U.S. interest rates have soared from zero-bound to a 22-year high in a span of under 18 months.
Finally, the Fed’s rate hikes have also led to a deceleration in U.S. consumption, and even if the slowdown – especially in the labor market – is not as deep or broad as the Fed may have wanted, it has nonetheless led to a slowdown for Affirm.
Apart from these headwinds, troubles at Peloton (PTON) – which was Affirm’s biggest customer – did not help matters. Also, formidable rivals like Apple (AAPL), Block (SQ), and PayPal (PYPL) have entered the BNPL industry, which has led to higher competition at a time when U.S. regulators have increased their scrutiny of BNPL companies.
Key Takeaways from Affirm’s Fiscal Q4 Earnings
Nonetheless, Affirm did manage to impress with its fiscal Q4 earnings last week. Revenues rose 22% YoY to $446 million, and easily surpassed the $406 million that analysts were expecting. Affirm guided for revenues between $430 million to $455 million in fiscal Q1 2024 - again, higher than analysts' expectations.
Notably, while credit market conditions have deteriorated, Affirm said that delinquencies were 30 basis points lower in the quarter after adjusting for Peloton and Pay in 4 loans.
The fiscal Q4 per-share loss of 69 cents was narrower than the 85 cents that analysts were expecting, while its GAAP operating loss margin was 55%, marking the lowest in seven quarters. Affirm posted positive adjusted operating margins in the quarter, and while the metric has several “adjustments,” the company expects to post positive annual operating margins going forward.
Affirm Stock Forecast: Strong Q4 Earnings Didn't Cut Ice with Analysts
Meanwhile, despite better-than-expected fiscal Q4 earnings, the results didn't cut much ice with analysts. While Wedbush and Morgan Stanley raised their target prices by a measly $1 each, the analysts maintained their underperform and equal weight ratings, respectively.
Overall, Affirm has received a consensus Hold rating from Wall Street. Only 3 analysts covering the stock rate it as a Strong Buy, while 8 more rate it as a Hold. One analyst rates the stock as a Moderate Sell, while 4 have a Strong Sell rating.
Affirm’s mean target price of $14.31 is about 18% below current levels, which captures Wall Street’s pessimism towards the BNPL company - but a few holdouts are bullish on the stock. Its Street-high target price of $24 towers 37% above current prices.
What Are the Opportunities and Threats for Affirm?
Let’s look at the various opportunities and threats that Affirm faces. On the brighter side, the BNPL industry is growing at a brisk pace, and Affirm is expanding its reach with new partnerships. It is particularly looking to expand in offline retail; during its fiscal Q4 earnings, Affirm noted that while offline retail accounts for 15% of total U.S. retail spending, only 5% of the company’s gross merchandise value (GMV) comes from the offline channel.
In terms of financial performance, Affirm managed to hit its adjusted operating margin target, despite the steep rise in U.S. interest rates. It has also launched the Affirm card, which had over 300,000 active users by mid-August - and the company notes that, on average, Affirm card users have 3x more transaction volume than other users on its platform.
That said, the company also faces some serious headwinds, including rising competition, a slowing economy, and a Fed which does not look amenable to rate cuts anytime soon. Affirm also sees the possible resumption of student loan repayments as a headwind, as it would lower purchasing power.
Is Affirm Stock a Buy or a Sell?
The BNPL industry holds a lot of promise, which was quite evident when Block acquired Australian BNPL company Afterpay in 2021 and Apple entered the industry in 2023. The industry is going through a challenging period now, but despite the rising competition, Affirm has managed to hold its ground.
Affirm trades at a next-12-month price-to-sales multiple of 2.72x, which might seem tempting given the multiple has averaged 10.64x since the company went public – but it’s a different market now, and even the valuations of profitable and established fintech players like PayPal have taken a hit.
All said, while I believe that Affirm is not a screaming buy at these levels, it is certainly a stock worth keeping on your watchlist, and is a potential buy-on-dips candidate. The company should see better days once the Fed starts reversing course on its tightening cycle - and while Chair Jerome Powell’s Jackson Hole speech last week yet again dashed any hopes of a quick pivot, I believe the Fed will start cutting rates sometime in 2024, which should be positive for names like Affirm.
On the date of publication, Mohit Oberoi had a position in: AFRM , AAPL , PYPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
