Affirm(NASDAQ: AFRM) was a hot fintech stock three years ago. The provider of buy now, pay later (BNPL) services went public at $49 a share on Jan. 13, 2021, opened at $90.90, and soared to a record high of $168.52 on Nov. 4, 2021.
But today, Affirm's stock trades at about $45, pulling back as new macro and competitive challenges throttled its growth. Rising rates also compressed its valuations and cast a harsh light on its high debt and persistent losses. So, should contrarian investors buy Affirm's stock while it's still trading below its initial public offering (IPO) price?
Image source: Getty Images.
How fast is Affirm growing?
Affirm's BNPL platform approves "microloans," which allow merchants and consumers to split single purchases into smaller installments. This is an attractive payment option for younger and lower-income consumers who can't get approved for credit cards. It also doesn't charge any compound interest or hidden fees on those payments.
For merchants, Affirm's transaction fees can cost less than the 1.5%-3.5% swipe fees most credit card networks charge. That's why big retailers like Amazon, Walmart, and Target all offer Affirm as an alternative to traditional card-based payments.
Affirm's number of active merchants, active customers, transactions per active customer, and gross merchandise volume (GMV) all surged in fiscal 2021 (ended June 2021) and fiscal 2022 (which ended in June 2022). Pandemic-driven online shopping, stimulus checks, and youth-oriented social media campaigns drove a lot of that growth.
Affirm also gained thousands of new merchants during those two years after integrating its tools into Shopify's e-commerce services. But in fiscal 2023, Affirm's growth cooled off as inflation curbed consumer spending.
Metric | FY 2021 | FY 2022 | FY 2023 | FY 2024 |
|---|---|---|---|---|
Active merchants growth | 412% | 710% | 8% | 19% |
Active consumers growth | 97% | 96% | 18% | 13% |
Transactions per active consumer growth | 8% | 31% | 30% | 26% |
GMV growth | 79% | 87% | 30% | 32% |
Revenue growth | 71% | 55% | 18% | 46% |
Data source: Affirm.
That deceleration, along with tougher competition from other BNPL platforms like Block's Afterpay and PayPal's Pay in 4, caused Affirm's stock to sink to an all-time low of $8.91 on Dec. 27, 2022. But if you had bought its beaten-down stock on that fateful day, you would be sitting on a gain of more than 400% today.
Affirm's stock skyrocketed because its GMV and revenue growth accelerated again in fiscal 2024. That acceleration was driven by its new merchant deals, the growing adoption of its Affirm Card (which merges a debit card with its BNPL options), and a warmer macro environment for travel bookings and general merchandise purchases.
In fiscal 2025, Affirm expects its GMV to rise at least 26%. Its business is maturing, but analysts expect its revenue to grow 29% and to continue rising at a compound annual growth rate (CAGR) of 24% from fiscal 2024 to fiscal 2027. With an enterprise value of $18.6 billion, Affirm still looks reasonably valued relative to that outlook at 6 times this year's sales. Looking back, it traded at a whopping 37 times its forward sales when it hit its all-time high in 2021.
But is Affirm's business sustainable?
The bears will tell you Affirm is unprofitable and basically facilitating tiny subprime loans that could easily collapse in a recession. But in fiscal 2024, the company significantly narrowed its losses as it laid off nearly one-fifth of its workforce, streamlined its spending, and replaced some of its employees with artificial intelligence (AI) chatbots.
Metric | FY 2021 | FY 2022 | FY 2023 | FY 2024 |
|---|---|---|---|---|
Operating margin | (43.6%) | (64.2%) | (75.6%) | (26.5%) |
Net income | ($431 million) | ($707 million) | ($985 million) | ($518 million) |
Data source: Affirm.
Affirm expects its operating margin to turn positive by the fourth quarter of fiscal 2025 and to stay in the black in fiscal 2026 and beyond. Analysts expect it to narrow its net loss to $176 million in fiscal 2025 and turn profitable in fiscal 2026.
As for the quality of its loans, only 2.4% of its monthly installment loans were delinquent by over 30 days at the end of fiscal 2024. That ratio declined to 1.5% for delinquencies exceeding 60 days and just 0.6% for those over 90 days. Those low delinquency rates dispel the notion that Affirm will be swamped by delinquent loans.
Should you buy Affirm while it's still below its IPO price?
Affirm weathered some tough headwinds in fiscal 2023, but its recovery and acceleration in fiscal 2024 indicate its business is sustainable. With interest rates declining and the macro environment warming up again, Affirm's growth rates should stabilize as it scales up its business.
Affirm's stock could remain volatile, but I think investors who buy it at a discount to its IPO price could be well rewarded in the future. That might be why its insiders bought nearly three times as many shares as they sold over the past six months.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Block, PayPal, Shopify, Target, and Walmart. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.
