Today’s argument is going to be a tough sell. It’s hard to suggest owning an asset that is falling without signs of abatement. But often good opportunities hide inside a basket of worries. So let’s set aside fear to try and find the potential upside in the long run.
This is not an argument to double down if already long, it is too soon. Affirm (NASDAQ:AFRM) stock had a strong second half last year. Sadly it is now 40% below the peak of that effort. AFRM stock peaked in November at $176 per share, and it is now struggling to hold $70.
This was a dramatic turn of events, but after large rallies stocks often fade a bit. That’s how they build better bases for future upside. AFRM is now back near the neckline from which it started the rally last year. Therefore, it is likely that there will be buyers lurking below.
Such is the conclusion today, that if the markets don’t correct AFRM stock can place a bottom soon. Going into $60 per share this stock becomes compelling to trade on the bullish side. It is important to recognize that in the shorter term, the bears are in control. The stock is making lower-lows and lower-highs. Ideally we’d want to see a sign of stabilization before committing longs.
Under normal circumstance, the bottom is a process, not a “v” shape flash. It all starts by stopping the lower-low trend. There are some good things happening towards that, like closing the gap from August. Machines now may be braver chasing some upside ticks.
Affirm is in the Right Spot
So far the conversation has been all about the AFRM stock. The long term thesis from the company is even more exciting. Financial technology (fintech) is at the heart of the future of banking from all its facets. Affirm is one of those companies that are shaping it, and will be participating a long while. It is part of a strong posse, and they are blazing trails extremely fast.
It is in good company with Sofi (NASDAQ:SOFI), Paypal (NASDAQ:PYPL), and Block (NYSE:SQ). Even the old dogs like Visa (NYSE:V) and MasterCard (NYSE:MA) are joining the new trends. There is no doubt that the world wants to transact electronically. Therefore demand on AFRM services should remain strong for a while.
The apparent ingredient that is missing for AFRM is time. So far the report cards suggest that management is executing well on plans. However, the company is relatively new to Wall Street therefore it is going to take time to earn trust.
According to Yahoo Finance, there are only six analysts covering it, all with bullish bias. Their average price target is 80% above current levels, where their lowest is 40% higher still.
The Disconnect Over the AFRM Stock Opportunity
Clearly, there is a disconnect between expectations and reality on where AFRM stock price should be. Let’s try and gauge the value of the current proposition that is in it. This is a growth story, so it would be appropriate to use the price-to-sales metric.
AFRM’s ratio is 20, which is not dirt cheap but it is definitely not flagrant. For absolute comparisons, it is slightly cheaper than Tesla (NASDAQ:TSLA) and Nvidia (NASDAQ:NVDA).
The reason the Federal Reserve is looking to end its QE is because inflation is hot. However, consumer spending in the U.S. is at record levels there. Affirm plays a big role in that because at the heart of its method is empowering us to spend. They offer consumers the power of buy now pay over time so that they can spend even when cash on hand is tight.
In reality it allows us to buy stuff we shouldn’t but that’s the game we play. This works well for as long as employment is healthy, and it is. The last report showed the U.S. at full employment for all intents and purposes. Pretty much everyone that wants a job can have one.
The world is producing cool stuff and everyone wants to have them. AFRM stock has a hook on both sides from the consumers and the businesses that serve them. This two front model ensures it having the opportunity for many new revenue streams in unlimited verticals. Give it time and it will impress you.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
