Will Affirm Stock Bounce Back?

Affirm Holdings, Inc. (NASDAQ:AFRM) has grown in popularity among customers due to its buy now pay later (BNPL) services.

The stock is up more than 90% over the past year. Just for context, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained only 25% over the same time.

However, a little bit of weakness was observed following Affirm’s latest earnings release so does the stock’s 39% loss decline over the past six months indicate muted potential? Or can it bounce higher?

Is Apple’s Exit From Buy Now, Pay Later a Red Flag?

With Apple most recently pulling out of the buy now, pay later market, sentiment has dimmed on the business model, which was once touted as a disruptor to credit cards.

So what is it that Affirm actually does that once attracted so many investors?

Affirm provides a point-of-sale solution that allows customers to make fixed-amount payments at a later date without deferred interests, penalties, or late fees. It embodies the literal acronym BNPL but skirts past the credit card pain point of interest charges.

Simultaneously, the company helps merchants reach a broader customer base by enabling them to better promote their products and provide them with deeper customer data and insights.

Affirm features an app where customers can apply for loans and then use their Affirm Card to make payments while for merchants, it charges a fee for facilitating transactions.

Some purchases enjoy zero percent annual percentage rate (APR) financing but these earn Affirm a larger merchant fee.

Then there are two loan offerings: Pay-in-4, the flagship offering, which represented 14% of its total GMV last quarter. and Core loans, whereby Affirm provides loans based on its proprietary risk model, a portion of which are then funded by its banking partners.

The BNPL sector sees a lot of growth right now as consumer credit has become a sticking point in an inflationary environment that is testing consumers wallets.

EMARKETER forecasts that in this year alone, 93.3 million consumers in the U.S. will use BNPL services, with total spending growing by 12.3% from 2023 to $80.77 billion.

Why Did Affirm Stock Fall After Earnings?

Affirm reported its third-quarter earnings in early May and management reported notable growth in key financial and operating metrics.

Gross merchandise value (GMV) grew by 36% from the prior-year period to reach $6.29 billion. Active consumers rose by 18% to 17.8 million, and their transactions per active customer increased by 25%. Last but not least, revenue grew by 51% year-over-year to $576.16 million for the quarter.

Adjusted operating income of $78.51 million also revealed a huge turnaround compared to the prior-year quarterly loss.

It wasn’t all rosy, though. Quarterly GMV, revenue, and adjusted operating income also posted sequential declines.  Much of that weakness can be explained away by seasonal variations given that the prior quarter enjoyed a holiday tailwind.

In the negative column also, there was an uptick in Affirm’s monthly installment loan delinquency rates (compared to FY 2022. Although it’s not as high as the 2018 level, it is certainly higher than the easy money years from 2020-22.

Overall, the positives seem to outweigh the negatives. So, why is the stock seeing a downturn lately?

A number of factors have contributed to the share price decline. For one, e-commerce sales growth has slowed down as interest rates remain uncomfortably high. 

Moreover, Affirm’s important partner, e-commerce company Shopify Inc. (NYSE:SHOP) predicted a slowdown in demand and gave a weak outlook after reporting impressive figures in its own earnings report.

Then there’s the bond sale that went awry whereby one of Affirm’s partners pulled out of an important financing, citing concerns over market volatility. That in turn shook investor confidence.

Will Affirm Stock Bounce Back?

Analysts forecast Affirm stock will bounce back higher by 31% to $36.93 per share, the consensus price target among 15 of them.

In spite of the disappointing share price performance over the past 6 months, analysts have been shifting more positively with three revising their earnings guidance higher for the coming quarter.

Until the fog of the current financing environment lifts and more confidence in loan funding is achieved, it’s likely that uncertainty weighs on the share price over the medium-term.

The Bottom Line

Although BNPL is not as prevalent as credit cards yet, the Gen Z population is increasingly turning toward BNPL services with the Millennial generation making up the majority of users.

Still, the company’s financial and user growth is impressive, and it has positioned itself well for the long-term by collaborating with big retail and e-commerce names like Amazon, Walmart, and Shopify.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.