This year has been a stellar one for Affirm Holdings (AFRM) investors, as the stock price has delivered 5x returns in 2023. That said, the bulk of these returns have been stacked in the back half of the year, and the rally has only really gained traction in December.
Affirm stock bulls expect the shares to keep rising from these levels, and Mizuho analyst Dan Dolev recently more than doubled his target price on the buy-now-pay-later (BNPL) company to $65, implying a premium of 30.7% over current prices. Meanwhile, Morgan Stanley downgraded the stock to “equal weight,” citing unfavorable risk-reward.
Here’s the good, bad, and ugly about AFRM stock, and whether the rally still has some legs left.
Why Is Affirm Stock Going Up?
To begin with, we should analyze why Affirm stock has been on fire in the first place. Here are the key reasons Affirm stock has gone up in 2023:
- Impressive financial performance: Affirm stock soared after its fiscal Q4 2023 and Q1 2024 earnings, as the company posted better-than-expected revenues and profitability. Its operating metrics, like active consumers and merchants on the platform, were also impressive. AFRM also posted an adjusted operating profit in the fiscal first quarter of 2024, ahead of projections. Importantly, the company managed to do so without compromising on the credit quality, and in the most recent quarter - while its delinquencies rose on a quarter-over-quarter basis due to seasonal trends - the metric fell 30 basis points YoY.
- Expanded partnerships: In November, Affirm announced that it has expanded its partnership with Amazon (AMZN), and its solutions would also be available on the company’s B2B (business-to-business) store. Earlier this month, it also announced an expanded partnership with Walmart (WMT), under which Affirm’s BNPL solutions will be available at self-checkout kiosks at over 4,500 Walmart stores.
- The uptick in the BNPL industry: Black Friday and Cyber Monday sales in 2023 hit a record high, and defied slowdown blues. The record sales were in part due to higher purchases through the BNPL mode and Adobe forecasted that November was the best month on record for the burgeoning industry.
- Fed’s dovishness: The high interest rate environment has been negative for fintech plays like Affirm and SoFi (SOFI). So, as the Fed signaled a dovish pivot and the December dot plot called for a cumulative rate cut of 75 basis points in interest rates, we saw a rally in interest rate-sensitive names like Affirm.
AFRM Stock 2024 Forecast
Affirm’s 2024 forecast looks positive, considering the expanded partnerships and the expected rate cuts, which should help lift the company’s top line as well as the bottom line. Analysts expect its revenues to rise 27.6% in the current fiscal year, while losses are expected to narrow.
The Fed’s dovishness is also a positive for growth names, and is supportive of their valuations. The BNPL industry should continue to grow steadily in 2024 given the current macro environment, where consumers are still battling high inflation and find paying through installments a worthy option.
Meanwhile, Wall Street is not particularly bullish on Affirm heading into 2024, and it has received a consensus rating of “Hold” from the 18 analysts covering the stock. Only 3 analysts rate AFRM stock as a “Strong Buy,” while 9 rate it as a “Hold.” One analyst rates Affirm as a “Moderate Sell,” and 5 as a “Strong Sell.” Its mean target price of $27.11 is almost 46% below current prices.
There appears to be a disconnect between Affirm’s seemingly positive business outlook and its ratings. However, that is not without reason; while Affirm as a company should see better days in 2024, the stock’s valuations look a bit stretched.
Affirm now trades at a next 12-month price-to-sales multiple of just over 7x - which, for perspective, is the highest since April 2022, a period that investors might recall as the start of the Fed's rate-tightening cycle, beginning with that first rate hike of 25 basis points in March.
Is It Too Late to Buy Affirm Stock?
I believe it is a bit late to initiate new positions in Affirm stock, and it might instead be wise to book some profits in the BNPL play after the stellar rally. That said, I am not yet fully giving up on the stock, and would continue to hold some shares for the long term as it might see brief rallies on expanded partnerships and any further dovish signals from the Fed.
On the date of publication, Mohit Oberoi had a position in: AFRM , SOFI , AMZN . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
