Up 117% This Year, Is Affirm a Buy?

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Affirm Holdings (NASDAQ:AFRM), a leading buy now, pay later company, is having quite a day, as its stock price has surged more than 19% as of 3 p.m. Eastern on Nov. 2.

Year to date, the fintech has gained a whopping 117% and is now trading at around $21 per share. With such a big run-up, both today and this year overall, should investors be eyeing this stock, or has it hit a peak and will fall back? Let’s take a look.

Big deal with Amazon

The catalyst for today’s big move was the announcement that Affirm had signed a deal with Amazon (NASDAQ:AMZN) to become its first buy now, pay later (BNPL) option on Amazon Business, its online store for sole proprietors that run small businesses. This is an expansion of Affirm’s relationship with Amazon, as it already is an option on Amazon.com for individual purchases.

Affirm allows customers to pay over time in installments, both online and in-store at checkout, without fees. The Affirm app approves or denies credit in seconds and lays out various payment installment options, including interest, from which the consumer can choose. The company makes money by charging merchants a fee each time it is used and from interest on the loans it makes to consumers.

This Amazon deal marks the launch of the new BNPL service for sole proprietors, which Affirm sees as a big opportunity.

“According to the IRS, more than 28 million sole proprietorships do business in the United States. By offering these business owners a transparent and flexible way to pay over time for the items they need, we can help them increase their purchasing power, better manage their cash flow, and accelerate their growth,” said Wayne Pommen, Affirm’s chief revenue officer.  

This is just the latest piece of good news for Affirm, as its stock price is up 117% year to date (YTD), but can it sustain that growth?

A highly volatile stock

Since Affirm went public in 2021, it has been a wild ride for investors. It had an initial public offering of $49 per share in January 2021, but it opened trading on the Nasdaq at $90 per share, as it came with a great deal of anticipation. By November 2021, it was up over $160 per share, but it came crashing down to $100 per share by January 2022. Then the bear market hit, and it lost 90% of its value in 2022, ending the year trading at just $8.80 per share.

Thus, when you see that Affirm stock is up 117% in 2023, keep in mind that it is still trading at only $21 per share and is down some 77% from where it started trading in January 2021.

However, there are definitely some things to like about Affirm, as it has been steadily growing. In the last quarter, its fiscal fourth quarter, it grew its merchant count by 8% year over year and its total consumers by 18%.

Further, the gross merchandise volume (GMV) of purchases using Affirm was $5.5 billion, up 25% year over year, while its revenue climbed 22% to $446 million in the quarter. Additionally, Affirm’s 30-day delinquency rate decreased by 30 basis points from a year ago, falling to 2.3%.

However, transaction costs, which are the costs to process and service the loans, rose 47% to $264 million, or 4.8% of GMV, up from 4.1% a year ago. This jump is primarily driven by higher interest rates. Those gains in transaction costs wiped out Affirm’s revenue gains and resulted in a net loss for the quarter.

Is Affirm stock a buy?

The new Amazon deal could certainly be a catalyst for Affirm, and there is a huge addressable market to tap into, as it has only penetrated 1% of the addressable market. On the other hand, there are a lot of competitors in this space, including some behemoths like PayPal (NASDAQ:PYPL), Mastercard (NYSE:MA) and Visa (NYSE:V). There are also economic headwinds and the expectation for interest rates to remain high.

In addition, Affirm’s valuation has crept up with its price-to-sales ratio now at 3.28, up from 1.92 at the start of the year due to the big run-up it has had. Analysts expect the share price to settle back down between the $16 to $17 per-share range over the next 12 months, which would be a drop of roughly 20%.

Affirm is set to report its fiscal first-quarter earnings on Nov. 8, so it will be interesting to see those numbers and get more visibility on its expectations for FY 2024. Certainly, it is an interesting stock, and one I’d monitor, but not buy until it moves closer to consistent profitability. There are too many variables right now to warrant a full endorsement.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.