When Affirm Holdings (NASDAQ:AFRM) went public at $49 per share back in January, the stock took off like a rocket. Shares in the e-commerce payments company nearly doubled in their first day of trading. But, after several weeks of triple-digit prices, and hitting a high of $146.90 per share, this recent initial public offering (IPO) has pulled back in a big way.
Down more than 50%, its massive pullback has been bad news for many who bought in near its highs. Yet, for those just taking a look now, its recent weakness may offer an opportunity. Why? At higher price levels, the stock got a bit ahead of itself.
But now, although valuation remains rich, we have a much more compelling entry point. While it’s benefited greatly from pandemic-related tailwinds, the trends backing this company aren’t going away once Covid-19 does. With plenty of room to expand, and a solid business model, there’s massive potential here.
Granted, a recovery may not be immediate. With the “reopening trade” taking much of the wind out of tech plays, a recovery back to $100 per share and above may take some time. Yet, for investors looking for e-commerce and “future of payments” exposure, post-pullback this is a great play for the long haul.
AFRM Stock and its ‘Buy Now, Pay Later’ Business Model
So, what exactly is Affirm’s business? The company provides “buy now, pay later” financing for e-commerce purchases. Helping to facilitate the sale of big ticket consumer items (think exercise equipment, home furnishings), it makes money from both sides. That is, from merchants it receives transaction fees. And, from purchasers, it charges interest on financing.
Installment loans are nothing new. This method for financing retail transactions is simply moving over to the e-commerce realm. And, given its positive impact on AOV (average order volume), it’s no surprise online retailers, large and small, have employed this service in their e-commerce operations.
This company was thriving before the events of 2020. But, much of its success in the past year of course can be chalked up to the overall acceleration in e-commerce thanks to the pandemic. After seeing its sales rise 93% in 2020, growth is going to slow down this year.
Yet, projected growth of around 53.6% in 2021, and around 33.46% in 2022, is hardly anything to sneeze at. Even with valuation a bit rich at today’s prices, its continued success in the coming years may be more than enough to send it back toward its high water mark, and beyond.
Things are Just Getting Warmed Up
After last year’s unexpected windfall for e-commerce, growth in 2021 and 2022 is going to look muted by comparison. Last year’s speed up in e-commerce may be slowing down. But it’s not coming to a screeching halt.
Some more skeptical about the stock may see its current valuation, and declare its full potential is already priced in. Yes, with a $17.8 billion market capitalization, against $669 million in trailing twelve month revenues, clearly investors are pricing this on its future.
But, while there’s a big growth premium factored-in, AFRM stock still has long-term runway. Sure, the near-term may bring continued sideways pricing. Like I said above, tech names that thrived during last year’s lockdowns are taking a backseat to stocks that stand to gain big during this year’s anticipated “reopening.”
Yet, as shares remain weak, now may be the perfect moment to enter a long-term position. 2021’s level of growth won’t top 2020’s. However, things are still warming up for Affirm. The e-commerce megatrend isn’t running out of gas anytime soon. And, as this fast-growing sector continues to expand, so will this company.
Bottom Line: Pounce on the Recent Pullback in AFRM Stock
For now, this is primarily an indirect play on the rise of e-commerce. Yet, it has the potential to become a diversified fintech operation. Put simply, looking at this simply as a “buy now, pay later” provider is short-sided. With a seasoned fintech leader (Max Levchin) at the helm, Affirm may someday join the ranks of other massive tech-focused financial companies.
As seen from this recent promotion, the company is starting to move away from just financing the purchase of goods, and is moving towards financing services as well. With its current business expanding fast, and the potential for it to expand into other areas of the fintech economy, it’s shaping up to be a fantastic long-term opportunity.
Better yet, after its recent correction, shares have fallen to a much more optimal entry point. So, what’s the play here? Take advantage of the pullback, and pounce on AFRM stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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