Affirm Holdings: Time to Ring the Register?

 | Dec 27, 2023 01:04PM ET

  • Affirm is a buy-now-pay-later (BNPL) platform that has seen its stock surge 439% year-to-date (YTD) on holiday shopping optimism and a short squeeze.
  • Affirm shares are still down 76% from all-time highs of $176.65.
  • Investors might consider taking profits as the "market has gotten ahead of itself," according to a Morgan Stanley downgrade.

    • Buy-now-pay-later (BNPL) platform provider Affirm Holdings (NASDAQ:AFRM) stock is up 439% year-to-date (YTD). If you’re wondering if this business services sector company released blockbuster revenues and an earnings blowout, they didn't. In fact, shares were trading around $27 after its latest earnings report. They reached $51.88 in the following month during the holiday shopping season. Investors who got into shares earlier this year are delighted.

    However, any investors who took a position before February 2022 are still in the red; many are in deep red. The share of Affirm reached a high of $176.65 in November 2021; then, it was downhill since then, reaching a low of $8.63 by December 2022.

    h2 2023 holiday shopping season optimism surge/h2

    While Affirm shares dazzled investors in December, shares are still down 76% from their all-time highs. Shares of Block Inc (NYSE:SQ), the parent company of competitor Afterpay, saw its shares spike back into positive territory, up 19% YTD. Block shares more than doubled after its Q3 2023 earnings report release on Nov. 3, 2023. Affirm Shares surged nearly 70% since Black Friday.

    Optimism for the 2023 holiday shopping season was further accelerated as e-commerce platform provider Shopify (NYSE:SHOP) reported a 24% YoY revenue surge to a record $9.3 billion over the Black Friday Cyber Monday (BFCM) weekend. Shopify served over 61 million customers that weekend, which helped propel shares up 115% YTD.

    h2 Tight budgets and high interest rates push consumers to BNPL/h2

    A key rationale for the surge in Affirm's business is the reality of a weaker consumer bitten by high interest rates and tighter discretionary spending budgets. With credit card rates at all-time highs, consumers mistakenly assume that BNPL programs are a better alternative to credit cards since they claim to be fee and interest-free, which is hardly the case.

    Most of Affirm's loans are interest-bearing. Perhaps they like being able to break up purchases into a set number of payments to stretch out budgets over several months. The temptation to receive a product now and pay for it in installments later works. It’s like reverse layaway. Affirm claims that 54% of consumers want a BNPL option at checkout, and 76% of consumers would delay or not purchase without a pay-later option.

    h2 Reality check/h2
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    Based on the latest earnings report on Nov. 8, 2023, Affirm recorded a loss of 57 cents per share for its fiscal Q1 2024, which was still 13 cents better than consensus analyst estimates for a loss of 70 cents per share. Revenues rose 37.3% YoY to $496.55 million, beating analyst estimates of $444.48 million. Gross merchandise volume (GMV) grew 28% YoY to $5.6 billion. GMV represents the total dollar value of all transactions facilitated through the platform as well as the financing charges and interest, late fees and other charges.

    h2 In-line guidance/h2

    Affirm provided in-line guidance for the holiday shopping season. For fiscal Q2 2024, Affirm expects revenues of $495 million to $520 million versus $503.58 million consensus analyst estimates. GMV is expected to be between $6.7 billion and $6.9 billion. For the fiscal full year 2024, Affirm expects a GMV of over $24.25 billion. The company notes that the forward interest rate curve and negative sentiment, along with student loan balance repayments, are all minor headwinds to be expected.

    h2 Morgan Stanley downgrade/h2

    On Dec. 18, 2023, Morgan Stanley downgraded shares of Affirm to Underweight from Equal-Weight with a price target of $20, up from $15. Analyst James Faucette commented:

    “While we believe Affirm is executing well amid its goal of becoming a more meaningful player in the payments landscape, at $44, we believe the market has gotten ahead of itself."

    On Dec. 19, 2023, Affirm announced it had been added as a pay-later option with monthly payment at self-checkout lanes at 4,500 Walmart (NYSE:WMT) stores in the United States.