Affirm (AFRM) shares soared over 11% yesterday after the Fed’s March dot plot reiterated three rate cuts for 2024. Rate-sensitive names like Affirm have been under pressure this year amid concerns that the Fed might take a more hawkish stance, as inflation is still sticky and above the 2% level that the central bank targets.
There was a broad-based rally in U.S. stocks yesterday as Fed Chair Jerome Powell sounded a lot more dovish than what markets were expecting. Meanwhile, despite yesterday’s rally, AFRM stock is still down 23.1% for the year. That slump was preceded by a stellar rally in 2023, when Affirm stock rose 408% during the year - way ahead of the 24% returns that the S&P 500 Index ($SPX) delivered last year.
Affirm Stock is Quite Volatile
Affirm stock is quite volatile, as is evident in its beta of 3.6, and the 2023 rally was preceded by a 90% fall in the previous year. However, despite the share price outperformance last year, AFRM is still way below the all-time high of $168.52 set in November 2021, as well as the IPO price of $49.
But then, it has been a different era altogether for growth names ever since the Fed started to raise rates in 2022. The valuations that growth companies commanded between 2020 and 2021 is no longer a yardstick for current times, with the most recent example being that of Reddit - which is going public at a massive discount to its 2021 private market valuation.
As for Affirm, is the worst over for this buy now, pay later (BNPL) company as the Fed looks determined to embark on rate cuts? Let's discuss.
Is the Worst Over for AFRM Stock?
I believe the worst is over for Affirm stock, as we seem headed for the “goldilocks” scenario - which means that while the U.S. economy is slowing down, a recession does not seem likely. Also, the Fed should start cutting rates sooner rather than later amid the slowdown, which bodes well for names like Affirm.
Apart from a supportive macro environment, there are several other reasons to be bullish on AFRM stock. These include:
- 1. The BNPL market is expected to grow at a fast pace: The BNPL market is expected to grow at a fast pace. Report Ocean expects the global BNPL market to grow at a CAGR of 22.8% between 2023 and 2029 and reach $86.85 billion. No wonder, then, that companies like Block (SQ) and Apple (AAPL) have also forayed into the industry.
- 2. Affirm has partnered with industry leaders to scale up its growth: Affirm has gradually expanded the merchants on its platform and has partnered with leading companies like Amazon (AMZN), Walmart (WMT), and Shopify (SHOP), which puts it in a good position to capture the growing adoption of BNPL among consumers.
- 3. Affirm is a well-run business: Just being in a high-growth industry does not guarantee success – a lesson that many investors have learned the hard way in the electric vehicle (EV) industry, where multiple companies are struggling to stay afloat. Affirm management has taken several actions to grow the business, including the launch of the Affirm card, which could be among its key growth drivers. Its revenue less transaction costs (RLTC) have also improved, and in fiscal Q2 2024, the metric surged 68% - over twice the revenue growth during the period.
- 4. Stable delinquencies: The company has also managed delinquencies well, despite higher interest rates and the macroeconomic slowdown. In its fiscal Q2 2024 shareholder letter, Affirm said, “We believe credit performance has largely returned to pre-pandemic trends.” Affirm has been quite conservative with underwriting, which has helped the business amid a challenging macro environment.
- 5. Valuations now look reasonable: While in the past I have been a bit apprehensive about Affirm’s valuations, the stock’s valuations now look a lot more reasonable and it trades at a next 12 months price-to-sales multiple of 4.8x. While the valuations might still not look mouthwatering, they have corrected from the over 7x multiple that we saw at the end of 2023.
Affirm Stock Forecast
Wall Street analysts are not too bullish on AFRM stock, though, and it has a consensus rating of “Hold.” Of the 17 analysts covering the stock, 3 have a “Strong Buy” rating, while 11 have rated AFRM stock as a “Hold.” One analyst rates the stock as a “Sell,” and 2 as a “Strong Sell.”
The stock trades above the mean target price of $35.91, but the Street-high target price of $65 - assigned by Mizuho analyst Dan Dolev - is 72% higher than yesterday’s closing prices.
Overall, I believe that the worst is over for Affirm stock, and the stock should see some upward momentum after having fallen sharply from its recent highs. The company is among the rare pure-play listed BNPL names, and given its strong execution, AFRM can command a premium at a time when there is a good amount of investor interest in the sector.
On the date of publication, Mohit Oberoi had a position in: AFRM , AMZN , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
