Will Affirm Stock Recover?

In 2020 and 2021, buy-now-pay-later (BNPL) emerged as a popular new form of consumer credit. One of the leading companies in this emerging industry is Affirm (NASDAQ:AFRM), which has sold off by more than 80 percent this year.

 

For investors seeking out opportunities to profit from BNPL, Affirm looks like a deeply discounted market leader. But will Affirm stock recover?

 

Affirm’s rapid drop began in February when the company missed analysts’ earnings estimates, reporting -$0.57 per share. Since then, steady losses and the generally sluggish macroeconomic climate have weighed heavily on Affirm.

 

Rising interest rates have played a major role in Affirm’s challenges this year. In addition to driving down the prices of high-growth stocks, higher interest rates also raise the risk of consumer credit delinquencies. The stock market, therefore, has had to price in this risk with regard to Affirm and other credit companies.

 

Affirm and other BNPL companies are also experiencing volatility as a result of pending regulation from the Consumer Financial Protection Bureau.

 

Citing risks of consumer harm, the CFPB has announced that it will move to regulate the industry, though it has not yet formalized its regulations. As such, Affirm and other BNPL companies are not yet sure how regulation will affect their ability to market and initiate new loans.

In the most recent quarter, Affirm saw a significant uptick in revenue growth. The company brought in $364.1 million, up 39 percent over the previous year. Interest income grew 33 percent. Funding costs rose by 24 percent year-over-year.

 

Earnings, however, continued to slide below analyst expectations. While the consensus estimate for the quarter was -$0.45 per share, Affirm reported -$0.65. This represented a major step backward, as earnings in the quarter before had risen to -$0.19 per share.

 

Affirm’s recent top-line growth is, of course, quite encouraging. However, the company’s continued earnings challenges have pushed its stock lower and lower throughout 2022. Net margins have also dropped to very low levels, with the current net margin standing at -52.4 percent.

Analyst forecasts are heavily divided on the direction Affirm will take over the next year. The 12-month price target for AFRM is $29.50, up an impressive 70 percent from the current price of $17.27.

 

The price targets range from $15 on the low end to $53 on the high end. With such a wide range, it’s clear that there is very little consensus among analysts.

 

In terms of value, Affirm’s metrics aren’t unreasonable when its growth potential is taken into account. The stock currently trades at 3.7 times sales and 1.8 times book value. Cash flow, however, is fairly concerning. At -$2.48 per share, the company’s cash burn will continue to weigh on share prices until it can be resolved.

 

Affirm has also managed to keep its debt from ballooning out of control. While the company’s debt-to-equity ratio of 1.56 is higher than ideal, the company clearly isn’t patching its losses with excessive borrowing.

 

While Affirm certainly has a hard road ahead of it, it may be too early to count the company out. During the pandemic, BNPL became a major component of the consumer finance landscape. As such, it’s likely that companies like Affirm will still have good growth opportunities going forward.

 

Affirm has successfully integrated with two massive eCommerce platforms, Amazon and Shopify, that could help it succeed as consumer confidence rebounds.

 

Thanks largely to its Shopify partnership, Affirm grew its merchant base by over 700 percent last fiscal year. Shopify also gives Affirm access to small and medium-sized merchants, allowing small businesses around the world to use its BNPL services.

The company is also a leading force within an industry that is still growing rapidly. Between 2019 and 2021, the volume of BNPL loans consumers took out multiplied by a factor of more than 10. Consumers have even embraced these loans for everyday purchases, making them more popular and giving Affirm access to a wider consumer base.

 

A final point in Affirm’s favor is the fact that its revenue is growing at such a rapid rate. While this doesn’t entirely make up for its losses, rapid revenue growth is a sign that the company is still performing well. With 21.6 percent growth projected for next year, it’s likely that this trend will continue.

 

With all of this said, Affirm still carries heavy risks. Steep losses and the potential for regulatory roadblocks are both significant downsides to buying Affirm stock.

 

Macroeconomic conditions could also have long-term effects on consumer spending, making borrowers less likely to finance large purchases with BNPL loans. Rising delinquencies could also extend the company’s path to profitability.

 

While Affirm’s value metrics aren’t terrible, they aren’t particularly good. As such, the company will have to generate solid growth in order for its share prices to rise appreciably. Delays in growth could cause share prices to stagnate or even fall further, presenting considerable risks and opportunity costs for investors.

 

Taking all of this into account, Affirm is high-risk, high-reward stock that will only be suitable for some investors. The stock has a serious chance of bouncing back during the next bull market, but it could also rack up additional losses. Investors who are looking for outsized returns in the BNPL market and don’t mind significant risk may want to look into Affirm.

 

For more conservative investors, a wait-and-see approach is likely the better course. If Affirm does rebound, there will likely be a decent amount of room for it to run. As such, investors who wait until the company’s direction is more clear may still be able to find buying opportunities that still offer respectable returns.

#1 Stock For The Next 7 Days

When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.

Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.

See The #1 Stock Now >>