Why Did Affirm Stock Go Down?

Why Did Affirm Stock Go Down? Shares of Fintech company Affirm (NASDAQ:AFRM) lost three quarters of their value this year, leaving investors who bought the stock in 2021 with heavy losses.

 

Affirm’s decline is heavily linked to current economic conditions and will likely only resolve when the economy begins to improve again.

 

To understand Affirm’s troubles, it’s first important to know a bit about the company’s business model. Affirm is a buy-now-pay-later (BNPL) service provider that underwrites loans for consumer purchases.

 

The company screens buyers with a soft credit check and then extends lines of credit that allow consumers to make large purchases through online merchants and pay for those purchases over time.

Affirm has three core problems that have sent its stock on a downward spiral.

 

To begin with, the company looks much less attractive today than it did a year ago. Losses extended from $27 million a year ago to $160 million in the most recent quarter. This coincides with a trend of rising delinquency rates on Affirm’s loans that was first noted in October 2021.

 

Although the company’s delinquency rate is still quite low, any increase is concerning for investors. Affirm has also been increasing the share of loans it extends to borrowers who fall outside of the highest credit tier.

 

Another problem for the stock is growing investor skepticism about the BNPL model.

 

Critics argue that the industry represents a risk-heavy bubble of unsecured debt. Consumers have shifted from using BNPL on large, one-time purchases to applying it to everyday purchases like household goods and clothing.

 

This widespread use of consumer credit, especially among younger buyers, could raise the risk of delinquencies and defaults if the economy enters a recession.

 

Finally, Affirm is heavily exposed to rising interest rates.

 

Affirm loans are made on a fixed-rate basis, meaning loans locked in by consumers months ago now have yields below the new prevailing interest rates.

 

Higher interest rates today could also reduce consumer spending, particularly as inflation continues to bite. Both sides of this equation are putting downward pressure on Affirm and could continue to do so as the Fed moves ahead with its series of planned rate hikes throughout 2022.

 

Despite its challenges, Affirm still has many good points. For FY22 Q3, revenue increased by 54 percent to $354.8 million.

 

Active merchants skyrocketed to 207,000 from just 12,000 the year before, a trend brought on by Affirm’s integration with Shopify.

 

Total transactions also rose 162 percent from the previous year. By all of these metrics, Affirm is achieving rapid growth and dramatically increasing its customer base and overall market penetration.

Despite the risks it presents, BNPL is also a clear winner among consumers. In the most recent quarter, more than 80 percent of Affirm’s transactions came from repeat customers who actively chose to use the BNPL model again after their first experience with it.

 

This payment method is also expected to remain the fastest-growing model for eCommerce payments through at least 2025.

 

There’s little doubt that Affirm provides a service that is immensely popular with consumers.

 

Shopify integration has enormously expanded the company’s catalog of merchants, and the number of repeat customers the company has suggests that users will continue to engage with Affirm going forward. Based on this, it seems reasonable to assume that Affirm’s stock is at least capable of regaining ground.

 

The question, of course, is what set of conditions could prime Affirm for a rebound. Being that most of the company’s problems are macroeconomic in nature, an eventual settling of inflation would likely be the best outcome for Affirm.

 

When inflation cools, the Federal Reserve will be able to ease off interest rate hikes, leading to a more predictable interest rate environment. This, in turn, would improve consumer confidence and lead to more online purchases using BNPL services like Affirm.

 

Counterintuitively, government regulation of the BNPL industry could also benefit Affirm. Regulatory standards could reduce the risk accumulated by providers while also creating a stable system for consumers and merchants to operate within.

 

The BNPL industry is still quite new, and it’s not yet clear how and when regulation will eventually affect it. Down the road, however, a more reliable framework of rules for the industry could help established providers like Affirm continue to prosper without taking on unacceptable risks.

 

With the stock off by over 75 percent YTD, there’s no question that Affirm looks more appealing from a value perspective than it did in January. Indeed analysts peg the company’s fair value at almost 90% higher than its current trading price. The consensus estimate for fair value is $40.87. 

 

However, the question of whether to buy Affirm isn’t quite that simple.

 

It is still quite expensive at its current price. The most concerning metric for Affirm is its price to sales, which stands at 5.41 against an industry average of 1.14. Affirm also carries a fairly high debt load with a debt-to-equity ratio of 1.62.

 

Affirm is a company that has considerable long-term potential under the right conditions. Those conditions, however, probably won’t reappear until later in 2022 or early 2023 at the earliest. As inflation eases, Affirm will likely begin a slow and steady recovery. However, the company still faces real risks if delinquencies rise too much.

 

In the end, Affirm could be a good opportunity for buying the dip, but it’s far from a sure thing. Continued macroeconomic challenges, stubborn inflation or a recession could all weigh heavily on the already embattled company in the short term. In the long run, however, things look much more positive if Affirm can maintain its growth trajectory and navigate the challenges it faces.

 

This stock is best for highly risk-tolerant investors, and even then it should probably comprise only a small portion of a larger high-growth portfolio.

 

Under those conditions, however, there’s a real argument for buying Affirm while it is sold off and holding for the long run.

 

Be aware, however, that it’s by no means clear that Affirm has reached its bottom. Subsequent interest rate hikes or other adverse conditions could still send the stock lower before an eventual rebound begins.

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