Why Is Affirm (AFRM) Up 100% In 30 Days?

Look at Affirm's stock price chart!

30 days ago, it was $20 per share. Now, it is $42, 102% higher.

Let's move to the right of the chart and look at the Analyst price target. Their average price target is 50% lower than its current price.

So, who is right? Is Affirm 100% better fundamentally than where it was 30 days ago, or are the financial analysts right about Affirm and the stock being overvalued? 

Let's talk about that!

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I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.

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Affirms Fundamental Strengths

Let's break down why Affirm stock is up more than 100%.

Looking at the stock price reaction to the latest quarterly earnings report, I highly doubt the jump is purely fundamentally driven. One reason for this is explained by the fact that Affirm is a stock held by Roundhill Meme ETF, meaning it has a significant portion of its outstanding shares shorted, resulting in a possible short squeeze in the last few weeks. 
But, there was positive news from the earnings report that triggered the short-squeeze. So what's happening there?
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1. Quarter-over-quarter revenue was up 30%, mainly thanks to a $50M jump in interest revenue. 
2. While the company didn't generate positive net income, the losses got drastically smaller this quarter. Affirm has been able to cut down its marketing, sales, and administration costs, which has helped with smaller losses. 
3. Another good news is that Affirm generates free cash flow by subtracting stock-based compensation from its bottom line. 
4. The company has over $6B in cash and cash equivalents vs. $5.5B in total liabilities and almost $2B in revenue. 
5. The Affirm Card that was recently launched already gained a 3% share of the company's active users and is up to 500K users. It's a card that allows people to pay for purchases immediately from their bank account or over time, effectively replacing both debit and credit cards in customers' wallets.
6. Moreover, Affirm recently partnered with Amazon to offer a buy-now-pay-later product to Amazon business customers, and it already has a remarkable merchant partner list, including high-rollers such as Shopify's ShopPay product.
7. In terms of moat, the company benefits from a strong technological moat. To understand Affirm's technical superiority in the BNPL space, you must listen to Shopify's executives discussing why they chose Affirm. Apparently, Shopify wanted to build its own BNPL product but realized the technical knowledge of financial underwriting and the risk it has to take are massive and decided to go with Affirm instead.  

Affirms Fundamental Risks

Shopify not wanting to deal with underwriting BNPL loans on its own is a segue to assessing the risk of investing in Affirm.  

• Affirm takes care of the risk assessment of its customers in-house and holds some of the loan balances on its balance sheet. If anything happens and the customers can't pay off their loans, Affirm's balance sheet and revenue from reselling these loans to other financial institutions may go down. Just this last week, the U.S. government's Office of Comptroller and Currency issued a bulletin warning banks and financial institutions of the hidden risks in BNPL. The government warns financial institutions of the credit risk associated with BNPL. BNPL consumers are typically lower-income customers who may have exhausted their credit card balance. Since BNPL transactions aren't yet included in traditional credit scores, customers may overextend themselves with several BNPL purchases. That means it's hard to judge the risk Affirm is facing in not being able to collect some of the loan balance it holds on its balance sheet. In response, the company shows the delinquencies on its loans are quite steady and much better than its competitors. However, there is still time to see that negative impact if there is a broader consumer delinquency risk due to credit card balances and too much reliance on BNPL in the coming quarters. For example, right now, if a customer uses multiple BNPL products across Affirm, Square, and PayPal, no one would know, and that can be a risk. 
• The other risk is that the growth we've seen on Affirms' topline and the bottom line is almost entirely thanks to higher interest revenue and cutting operational and administration costs. The so-called path to profitability isn't clear yet. If there is no more cost-cutting possible, we now need to see higher-margin products grow for Affirm to turn profitable. That's possible with the new Affirm Card, but it is something to watch in the coming quarters.
• The other risk is the company's stock price valuation. With the recent 100% jump, the valuation is up to 4 times the price-to-sales ratio, higher than its peer companies, indicating investors are already pricing in 4X growth in revenue. Mind you that the current valuation is still drastically lower than the all-time high of 25 times price to sales ratio in 2021. Assuming Affirm can grow its topline revenue at the same rate as the overall BNPL market, which is expected to grow 30% in the next few years, then, in a little more than five years, Affirm can grow its revenue by four times. The question is, can the company keep up with the overall market growth, and can the industry grow at the expected 30%? No one can predict the future. 

Is Affirm stock A Buy?

Affirm certainly has a great story to tell with its Affirm Card and its focus on giving consumers this new form of payment card instead of any debit and credit card. And the BNPL market is definitely expected to grow significantly in the coming years. 

What would I do? If I only want to invest in 20 stocks maximum, which is my goal for 2024, I must make relative judgments about which stock deserves a spot in my portfolio. With that goal, purely from a valuation point of view, I would rather invest in a company like PayPal, with a significantly lower valuation at this point and a steady free cash flow and positive earnings, who, by the way, happens to have a bigger market share in BNPL segment than Affirm. If I want to take consumer delinquency and credit risk and bet on the BNPL market, I prefer PayPal over Affirm.

There is a fundamental analysis post on PayPal that you can read after this post. 

If you have read until this point, it means you have a curious mind and want to do your own research. So continue your fundamental research on Affirm on Stock Card: StockCard.io/AFRM. If you end up there and want unlimited access, use promo code "welcome" to get 20% off your annual VIP subscription.

I'll see you next time,

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