Affirm (NASDAQ:AFRM) stock a fintech company focusing on the buy-now-pay-later (BNPL) business model has been an (initial public offering) IPO that is a big failure. After reaching a top in November 2021, the only way the AFRM stock has moved is down.
It all seemed nice back in January 2021 when Affirm set its IPO price at $49 a share and closed at $97.24 on its trading debut.
It even made a 52-week high of $176.65 for lucky investors and is now trading at $32.56 near its 52-week low of $30.78. For greedy investors that like the BNPL model, they held their shares and did not sell, wishing later stock price would be even higher.
Before the opening of the U.S. stock market on March 14, AFRM stock seemed to not bounce back but to make a new 52-week low. The momentum is one-sided to the downside, and there are very good reasons why this is supported and explained.
Bold investors may think that AFRM stock is already having losses of approximately 70% in 2022, so the bottom for the stock should be too close. Avoid this thought completely. No one knows the actual to top or bottom of any stock price, and cheap stocks can become way much cheaper. While expensive stocks can become more expensive, one day a catalyst or smart money can change the story or simply book profits.
The Rush to Go Public Ignores Valuation
I am a supporter of the opinion that IPOs tend to be mostly overpriced for several reasons. First, Wall Street will make more money considering the underwriting fees the higher the valuation will be.
For a company raising cash, it is considered a success to have a trading debut price higher than its IPO price, and if a rally occurs on the first day, then making headlines is a great reward. Sadly, this reward is often very short-lived as logic and valuation concerns at some point will kick in with force and turn things upside down. Take for example this CNBC article on the performance of IPOS as about “2021 deals have fallen 14% on average in the six-month post-IPO period, compared to a historical average of a 14% gain, according to Bank of America.”
Dismal returns are a phrase Wall Street hates to hear, but it is often a reality. Why this dismal return for AFRM stock?
Doing All the Wrong Things A Business Should Not Do
The fiscal year 2022 second-quarter results showed that it is one thing to have a great vision, and another thing to have a very poor financial performance.
“Affirm’s mission is to deliver honest financial products that improve lives.”
Affirm wants to help consumers spend responsibly and merchants have greater conversion sales so that commerce will thrive.
At some point in time, the sooner the better Affirm’s management should make a thorough meeting and ask themselves the following. Could it be we are doing something very wrong, and our business is not making value for our shareholders?
The last time I checked Affirm is not a non-profit company, it is a public traded U.S company to make a profit and make its shareholders happy. It is fine to have a social value and a dream to help consumers and merchants, but what if your business model does not help your own business? Who will help you from avoiding bankruptcy or become a penny stock when not so far ago you were celebrating a trading debut that now is like the “Back to the future” films?
Affirm’s management should see all the “Back to the future” movies and hit the pause button at the moments when things have become worse. Because right now with a huge widening loss reported in Q2 FY2022 of ($159.7 million) compared to a net loss of ($26.6 million) in the same quarter a year ago, and with a cash burn problem and a stock dilution of 10.5% in the past year investors do not like what they see. Why would they be happy?
The Bottom Line
This is a dedicated part that Affirm presents ways it makes money. Loan services, facilitating a transaction with merchants, interchange fees when consumers use the virtual card, interest-bearing transactions are among the ways Affirm generates revenue.
The fintech company states that “We win when they win” referring to the merchants and clients. The problem is that Affirm does not win as it loses money.
The question should be changed to how Affirm should be making money consistently? It is a tough question, but it is the right one. Unless things change for Affirm too soon why investors should support the declining stock price. Expect more weakness for AFRM stock until hopefully the meeting mentioned above is done.
On the date of publication, Stavros Georgiadis, CFA 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.