Now is Your Chance to Buy Affirm at a Steep Discount

Advertisement

As someone who had been bullish on Affirm (NASDAQ:AFRM) stock as early as February last year, I have been burned on recent price action. Seeing all those gains wiped out has reminded me about the volatility inherent in these growth stocks.

Affirm (AFRM) logo displayed on a smartphone
Source: Piotr Swat / Shutterstock.com

However, as Warren Buffett always says be “greedy when others are fearful.” And oh boy, has there been panic in the market lately.

Rising Interest Rates to Negatively Affect Affirm

Despite my optimism for the company long-term, there is no doubt the next few weeks may continue to be rough for Affirm. In a note written to clients, Morgan Stanley analyst James Faucette believes that payment stocks like Affirm “still have a ways to go before the market gains conviction again.”

He cites the slow rebound of international tourism, lack of capital inflows, and volatile interest rates as major macro-economic concerns. In particular, he notes that the rapid change in implied interest rates can impact Affirm’s performance relative to legacy payment processors like Visa (NYSE:V) and Mastercard (NYSE:MA).

This is due to the “Buy Now, Pay Later” business model having much more direct interest rate exposure. Remember the way Affirm works is that it charges a fixed rate that is calculated over a number of pre-determined payments. Customers are never charged compounding interest rates, late fees, or penalties on the loans.

The rise in interest rates can negatively affect Affirm in two ways. The first is that the increased rates can reduce customer spending. Higher fixed interest rates mean higher payment obligations therefore customers may have second thoughts on spending that amount of money.

Higher variable interest rates could also afjfect Affirm negatively. The increase in variable rates reduces the company’s margin on its fixed-rate charges. As described in the risks section in the company’s 10-K.

“Given the fixed interest rates charged on the loans originated on our platform, in the event that variable interest rates rise across the market, our interest margin earned in these funding arrangements would be reduced. Dramatic increases in interest rates may make these forms of funding nonviable.”

Long-term Growth Remain Intact

The future continues to look bright despite the difficult macro-economic environment. The company’s stock had dropped like a knife since its all-time highs in November last year. AFRM stock has lost roughly 65% of its value since then. This outcome was not too surprising as despite the promising growth story, AFRM stock was trading at extended valuations.

Investors in AFRM stock finally got a bit of reprieve from the non-stop bleeding this Friday. Investment firm DA Davidson upgraded AFRM stock from neutral to buy with a price target of $75.

At the current price levels, the stock is trading at a much more attractive valuation given its growth prospects. According to a note by the investment bank, buy now pay later usage in the US more than doubled this holiday season.

This proves that customers are extremely receptive to Affirm’s business model. The fact that the company’s Amazon’s (NASDAQ:AMZN) buy now pay later vendor also boosted its results.

Your Takeaway

Investors might want to consider following DA Davidson’s buy recommendation. The company’s price target implies a 25% upside from current price levels.

AFRM stock is trading at such a deep discount that even long-term shareholders should think about dollar-cost averaging at these levels. Dollar-cost averaging is a good alternative to “timing” the market and will lower the average cost of stocks in the portfolio. This will lead to much higher profits when the stock finally rebounds.

The difficulties facing Affirm are largely brought about by inflation and the current macro-economic environment. The company itself is executing well on its growth plans and firing on all cylinders. Therefore AFRM stock should rebound on any positive news from its current depressed levels. I believe that the current price level is an attractive buying range for AFRM stock.

On the date of publication, Joseph Nograles 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.

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now. 

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.


Article printed from InvestorPlace Media, https://investorplace.com/2022/02/afrm-stock-now-is-your-chance-to-buy-affirm-at-a-steep-discount/.

©2024 InvestorPlace Media, LLC