Avoid Affirm as It Waves Major Red Flags


AFRM stock - Avoid Affirm as It Waves Major Red Flags

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Affirm (NASDAQ:AFRM) continues to fly multiple red flags, including a high valuation, very tough competition and a bottom line that may be deteriorating. Additionally, there are multiple signs that the Street is quite bearish on the shares. In light of all of these points, I continue to recommend investors sell AFRM stock.

The trailing price-to-sales (P/S) ratio of AFRM stock is over 7x. That’s rather expensive for a company whose technology is not hard to duplicate. In fact, companies like PayPal (NASDAQ:PYPL) and some major credit card networks are implementing Affirm’s bread-and-butter product: “Buy Now, Pay Later” (BNPL) offerings.

Deutsche Bank  recently wrote that, although Affirm was frequently viewed as a tech company in the past, it’s starting to be seen by investors as more of a financial company. I agree Affirm is much more of a financial services firm, but I think its stock is still being valued like a tech name.

And as I’ve said in previous articles on Affirm, the company continues to face a great deal of competition in the BNPL space. Its partnership with Amazon (NASDAQ:AMZN) should help it continue to attract many consumers. Still, the intense competition is likely to keep a lid on Affirm’s margins.

Speaking of margins, the company’s profitability seems to have deteriorated last quarter versus the same period a year earlier. Specifically, its operating loss, excluding certain items, came in at $7.9 million. That was worse than the $3.1 million adjusted operating loss Affirm reported during the second quarter of fiscal 2021.

First of all, in March, a large investor who was going to participate in the company’s asset-backed securities sale reportedly decided at the last minute not to take part. In my opinion, that indicates the investor may have identified major problems for Affirm on the horizon.

Additionally,  Deutsche Bank recently cut its price target on AFRM stock to $35 and kept a “hold” rating on the name. In addition to its aforementioned warning, Deutsche Bank warned that upcoming macro trends could be bearish for the company.

Similarly, Piper Sandler started coverage on AFRM stock with a “neutral” rating. The firm thinks that the company will expand less quickly in the long term than bulls believe. Given all of its weaknesses, AFRM stock remains a sell.

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 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 PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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