Affirm Stock Will Suffer From Profitability Woes for the Foreseeable Future

The outlook for Affirm (NASDAQ:AFRM) stock isn’t great. The Buy Now Pay Later (BNPL) company is facing tough competition and its alliance with Amazon (NASDAQ:AMZN) hasn’t kept its profitability from plunging.

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

As I explained in a previous column on Affirm, there’s nothing to prevent the largest credit card networks and banks from entering the BNPL business.

I also reported that JPMorgan (NYSE:JPM), American Express (NYSE:AXP) and PayPal (NASDAQ:PYPL) had already entered the space. Visa (NYSE:V) and MasterCard (NYSE:MA) have also climbed aboard the trend.

Also important to note is that Affirm’s losses are trending higher, while there’s no evidence that it has a viable path to profitability.

A Closer Look at AFRM Stock

Affirm’s increased competition means the company’s losses are rapidly rising. Its Q2 operating income came in at negative $196 million. The number was worse than the negative $26.8 million it reported during the same period a year earlier and the negative $166 million it generated in Q1.

What’s more, the company expects its Q3 operating margin, excluding certain items, to be -19.5%, versus -2% in the previous quarter. For the full year, Affirm predicted that its adjusted operating margin would come in at -13%.

Finally, the company’s guidance for the current quarter indicates that its gross merchandise volume (GMV) could decline versus the previous period. (At the midpoint of the Q3 GMV guidance range, Affirm’s GMV would decline sequentially).

Rising Costs Are a Problem

Affirm’s sales and marketing costs are soaring and increasing at a much faster rate than its revenue. It’s a phenomenon I’ve seen recently with several tech companies in competitive sectors.

For example, in Q3, its sales and marketing costs more than tripled year-over-year to $143.5 million, versus $39.1 million in the year-earlier period. Over the six months that ended in December, its sales and marketing costs also skyrocketed more than 200% year-over-year, coming in at $207.44 million.

Last quarter, Affirm’s sales and marketing costs alone were equal to 40% of the value of its total revenue. Moreover, its spending on sales and marketing, combined with its general and administrative costs, amounted to nearly 80% of its revenue.

I think it’s very likely that Affirm’s sales and marketing costs are jumping primarily because it is going head-to-head with huge companies. Additionally, Affirm, other than its partnership with Amazon, does not appears to have any significant advantages over its competitors.

When I wrote my last column, I expressed some hope that Affirm’s partnership with Amazon would boost its financial results. Now it’s clear that the deal has not stopped the company’s costs from soaring nor its profitability from plunging. Moreover, the alliance may not even stop Affirm’s GMV from sliding sequentially this quarter.

The Bottom Line on AFRM Stock

With Affirm predicting that its adjusted operating margin will plunge this quarter, the company’s profitability is unlikely to rebound anytime soon.

JR Research asserted in its Feb. 25 article that it was unable to identify a long-term competitive moat that could raise its profitability.

Unfortunately, I agree with that analysis.

Affirm’s profitability looks poised to continue dropping for the foreseeable future. Meanwhile, its price-sales ratio, at nearly 21, is still very high.

Therefore, I advise investors to sell the shares.

On the date of publication, Larry Ramer 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.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.


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