Down 70% year to date, is there any hope for financial technology concern Affirm Holdings’s (NASDAQ:AFRM) stock?
Caught in the “tech wreck” that has hobbled other high value technology securities and fintech stocks, Affirm Holdings’ share price has also been hurt by an investigation carried out by the the Consumer Financial Protection Bureau (CFPB) into the practices of buy now, pay later companies like Affirm. Now the CFPB simply requested information about Affirm’s lending practices by March 1 and said that it is trying to better understand the buy now, pay later space. Other companies such as PayPal (NASDAQ:PYPL) and Afterpay (OTCMKTS:AFTPY) also were required to provide information as part of the inquiry. But while seemingly benign, the very mention of the words “investigation” and “probe” were enough to further depress AFRM stock.
Good News, Bad News
Affirm, which quickly approves small loans to consumers that they pay off over several installments, has reported strong growth that appears to be accelerating. In its most recent earnings, Affirm announced that the number of merchants using Affirm increased 64% from the previous quarter to 168,000. The number of active consumers using Affirm now stands at 11.2 million, representing 150% year-over-year growth. The total value of transactions on Affirm’s platform, called “gross merchandise volume,” rose 152% to $4.4 billion in the most recent quarter. Affirm also boasts partnerships with global e-commerce companies such as Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP).
That was the good news.
The bad news, and the reason why AFRM stock sold off heavily post-earnings, is that the San Francisco-based company is hemorrhaging money. The company reported that its revenue grew 77% to $361 million in its fiscal second quarter, handily beating Wall Street expectations of $329 million in revenue. But the company also reported an operating loss in the quarter of $196 million, which brought its combined losses over the past six months to an eye watering $469 million. Affirm blames the steep losses on its marketing budget, which it grew 267% year over year in the second quarter to $143 million.
Making matters worse, Affirm has sought to shore up its balance sheet that is awash in red ink by issuing $1.7 billion worth of five-year convertible notes with a 0% interest rate. The debt issue, which will provide no income to the company, was seen as an act of desperation by analysts and traders. As a result, this prompted many traders to reach for the “sell” button.
Coming Back to Earth
The massive growth and heavy losses have made Affirm emblematic of the type of technology stock investors are running away from in an inflationary environment.
In many respects, AFRM stock is the type of security that thrived 18 months ago at the depths of the pandemic. It fit in nicely with special purpose acquisition companies, (SPACs) memes and stay-at-home plays. But now its valuation is now being brought back to earth as the global economy reopens, war rages in Europe, and fears of a recession grow stronger. At its current level of $36.90 a share, AFRM stock is now 27% lower than its January 2021 initial public offering (IPO) price of $49, and is 80% below its 52-week high of $176.65 reached last November.
Of course, Affirm is doing its best to diversify its product offerings and keep on growing at a blistering pace. The company is now testing a debit card that connects to customers’ bank accounts and allows them to split up payments on purchases between $100 and $1,000. The company says initial trials of the debit card have been positive and the payment method is proving to be popular with consumers.
Additionally, the company recently raised its forward guidance. It expects full year revenue of at least $1.31 billion, up from a previous range of $1.29 billion to $1.31 billion, and said it expects an adjusted operating loss as a percentage of revenues of 11% to 13%.
Yet nothing, so far, has been able to stop the bleeding in AFRM stock. The company’s share price fell 15% immediately after the revised guidance was made public.
Stay Far Away From AFRM Stock
Anyway you look at it, buy now, pay later company Affirm Holdings is a bad bet.
Massive financial losses, debt issuance, and a regulatory investigation into its operations have led the company’s share price to crater. Add in deteriorating sentiment towards fast growing, unprofitable technology stocks, and interest rates that are only expected to keep rising this year, and Affirm Holdings seems like an almost untouchable stock.
Investors would be best advised to stay far away from this security until it manages to turn its finances around and prove that it has real staying power. AFRM stock is not a buy.
On the date of publication, Joel Baglole 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.