Don’t ‘Buy Now, Regret Later’ by Bottom-Fishing in Affirm Stock

AFRM Stock - Don’t ‘Buy Now, Regret Later’ by Bottom-Fishing in Affirm Stock

Source: Tada Images / Shutterstock.com

  • While down more than 75%, AFRM stock is another name that’s “cheaper” today, yet for a good reason
  • Mainly, because like similar names in other industries, it’s only growing by providing a service at a loss
  • Although early-stage companies in the same boat may have a way to grow out of today’s challenges, Affirm may not have that ability

Fintech stocks have taken a beating over the past six months. But Affirm Holdings (NASDAQ:AFRM) takes the cake. Since hitting $176.55 per share in November, shortly before growth stocks started to tank, AFRM stock has plunged to around $40 per share. That’s a more than 75% decline for the “buy now, pay later” (BNPL) services provider.

Comparing its drop in price, against projected growth, you may think this is a fintech firm to scoop up while it’s out of favor. Yet while scooping up names like PayPal (NASDAQ:PYPL) or even SoFi Technologies (NASDAQ:SOFI) could be profitable in the long-run, that may not be the case here with Affirm.

Why? Like some other busted growth stories out there, profitability, or the lack thereof, is the main issue. Selling an in-demand service at a loss, it’s no shock it’s able to scale up its top line. At some point, though, it needs to get out of the red.

Add in the fact that it may face more challenges in the coming years? Even once the external factors weighing on fintech pass, this name may not join in on the recovery.

AFRM Affirm Holdings $40.71

What AFRM, CLOV, and DKNG Stocks All Have in Common

At first glance, it’s easy to compare Affirm to its closest peers. That is, larger names in the fintech space, like Square parent Block (NYSE:SQ) or PayPal.

Yet when it comes to the main factor behind the poor stock market performance of AFRM stock, the company has a lot more in common with two names in completely separate industries. I’m talking about Clover Health (NASDAQ:CLOV) and DraftKings (NASDAQ:DKNG).

Like Clover (with Medicare Advantage plans) and DraftKings (sports betting/i-gaming), Affirm is seeing high growth by providing an in-demand service at a loss. As you may know, Clover is paying out more in claims than it’s collecting in premiums. DraftKings is attracting users through the aggressive use of promotions.

In the case of this company? It’s spending more than it takes in to convince two pools of customers to utilize its installment loan service. First, to convince individual consumers that its service is a better alternative to using credit cards for purchases. Second, to convince merchants that offering its service as a payment option will help increase sales.

Why the Situation May Not Improve for Affirm

Admittedly, the fact it’s spending more than it’s taking in, by-itself, may not be an issue. If it was on the road to scaling up out of the red, that is. Clover may be able to grow out of its profitability issue. Although I’m skeptical, due to rising competition, that DraftKings could do the same thing as well. But that may not be what happens with Affirm.

Revenue growth is starting to decelerate. Between fiscal 2020 (year ending June 2020) and fiscal 2021, total revenues grew around 70.9%, from $509.5 million to $870.5 million. This fiscal year, per its most recent guidance, revenue is expected to rise to $1.31 billion. In other words, around 50.5% annual top line growth.

Sure, that doesn’t sound like an issue. 50.5% growth is nothing to sneeze at. Especially as analyst estimates call for slight deceleration during fiscal 2023 (44.8% revenue growth). However, the sell-side does project high earnings per share (EPS) losses for AFRM stock for both this fiscal year and the next.

Not only that, many factors could result in worse-than-expected operating performance going forward. For example, a move by the big banks into BYPL services could impact growth. Similar to what has happened with PayPal’s Venmo unit, with the rise of Zelle, which is owned by a consortium of major U.S. banking institutions.

Also, as my InvestorPlace colleague Ian Bezek recently argued, Affirm could see larger than anticipated loan losses, if the economy enters a recession. Belt-tightening by households could result in more borrowers deciding not to make their installment loan payments.

AFRM Stock: Forget Buying Now, and Possibly Later as Well

In closing, I’ll admit that it’s not as if the other fintech names face challenges of their own. SoFi, a fintech I’m bullish on, has plenty in play that could damage the bull case for it. As Louis Navellier recently argued, it’s too soon to say it’s all uphill from here for PayPal.

Yet, while a road to recovery may be long for fintech in general, it could be especially long for AFRM stock. Until it starts resolving its profitability issue, and signals it could overcome the extra challenges that may lie ahead, avoid it. Whether now, or later.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/afrm-stock-dont-buy-now-regret-later-by-bottom-fishing-in-affirm/.

©2022 InvestorPlace Media, LLC