Although Affirm Holdings (NASDAQ:AFRM) stock jumped upward on Jan. 28, I wouldn’t expect it to continue that momentum.
Let’s just jump right into it because the temporary good news looks to be just that, temporary.
Wall Street Upgrade
Affirm Holdings is a buy now, pay later (BNPL) business. It’s fundamentally different to credit cards which customers have grown accustomed to. Basically, customers don’t have to pay interest fees. A $100 BNPL purchase will cost you $100 in future payments.
That’s attractive to be sure. And it has caused investors to pile into AFRM stock which has shown strong growth. However, it fell in the tech sell off. Unfortunately, it hasn’t bounced back.
I don’t think it will. It did bounce back on Jan. 28, but that is probably a temporary movement. Ratings firm DA Davidson upgraded AFRM stock to a buy rating on Jan. 28. That sent prices from $48 to $58. I don’t think it’ll last. The reason is a point of distinction between it and other growth firms.
Wrong Growth Play
Followers of the stock market know that inflation spells trouble for easy money policy. That in turn leads to rising interest rates, which in turn leads to trouble for growth stocks.
Rising interest rates equate to declining prices for growth stocks. That’s what we saw throughout December as hawkish Federal Reserve’s signals sent growth plays including AFRM stock tumbling.
Some of those growth plays will rebound despite money policy. I think Upstart Holdings (NASDAQ:UPST) is a good example. The reason is that Upstart Holdings has both strong growth and net income.
In the third-quarter, Upstart Holdings posted revenues that grew by 250% and net income, not a loss, which grew by 201%. My assertion is that the market will reward Upstart even though it is a growth play because it has strong fundamentals which include net income.
Affirm Holdings, on the other hand, doesn’t.
Affirm Represents Reckless Growth
Affirm, like Upstart, also posted impressive growth figures in its latest earnings report. Revenues increased by 54.8% on a year-over-year basis. Not as strong as Upstart’s, but that’s not the point.
The point is that Affirm Holdings posted a $306.6 million net loss during the period. Upstart, $29.1 million in net income.
Both stocks were pulled down in December. Upstart has shown signs that it could rebound on fundamental strength. My assertion is that Affirm only jumped because the analysts at DA Davidson stuck their necks out for it. I see that as a temporary catalyst that the market will soon see through.
Active Consumer Growth Takes a Backseat
Affirm Holdings points to its rapid growth in consumer base as a point of attraction. The company went from 3.9 million users on Sept. 30, 2020 to 8.7 million a year later. That’s impressive. Likewise, the company saw its consumer base expand from 7.1 million by the end of June, to 8.7 million by the end of Q3.
But it comes back to the same argument that as impressive as growth is, it doesn’t matter in this environment. The market first punished all growth companies. That has begun to change. It will continue to punish growth companies that also have large losses. That group includes AFRM stock.
My thesis is that the DA Davidson upgrade isn’t going to matter in a few days to a week.
What to Do
I don’t think the timing is right for AFRM stock and investors. This is purely about market mechanics and the way news gets digested.
I can’t see why Affirm Holdings should reasonably bounce back quickly given losses into the hundreds of millions of dollars. The cycles that favor growth stocks take several months. AFRM stock shouldn’t pop for a while. All growth stocks won’t necessarily continue to suffer, but Affirm Holdings looks like it should.
On the date of publication, Alex Sirois 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.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
