AFRM Stock Report
Summary
Affirm Holdings (AFRM) is a fintech company operating a hybrid business model that lets consumers apply for loans at points of sale with various merchants. These loans are then repaid in different installments. While the loan originators are usually other financial institutions, it is Affirm which is ultimately responsible in the event a customer cannot repay. Thus, they have a provision for credit losses on their balance sheet, similar to a bank. This aspect complicates an otherwise straightforward valuation process of a technology company, whereby the risk models employed by Affirm are known only by them.
There are 3 key aspects that will determine this company’s future stock price: the strength of the consumer, the path of interest rates and shareholder dilution. In the current environment, this stock looks like a high-risk, high-reward play, with potentially vastly different outcomes.
Operating Model
We note:
Very high Gross Profit Margin, with almost all revenue booked as Profit
Operating Expenses that are growing faster than revenue, and are currently higher than revenue
Deteriorating Operating Margin (10.53%, -15.73%, -49.06% across the 3 years studied)
Strong revenue growth
Very high shareholder dilution (a 586% increase in shares outstanding over 3 years)
30 Day Risk Free Trial
Try our Research Plan and see if it’s right for you.
Balance Sheet
We note:
Balance Sheet appears strong, with solid Liquidity and Solvency ratings
These figures may be misleading, as the structure of the balance sheet is more similar to a financial institution than a technology company
The company recognizes consumer loans as assets - therefore, in the event of a sudden wave of defaults, their assets will take a nose-dive
Projections
Revenue
Revenue growth has stalled during the last 4 quarters (red line). This is very bad news for a supposedly “high growth” company. Nevertheless, our ML model points to continued revenue growth in the quarters ahead.
Gross Margin
We shall keep Gross Margins flat, at 94%.
Operating Expenses
We shall assume a more aggressive path of Operating Expenses growth. In a rising interest rate environment, the company will need to offset potential weak credit demand with more marketing and incentives.
Valuation
Method: Peer Analysis
Filtering for similar companies, we find AFRM’s peers fairly valued at 3-4 EV/Sales on average. We will solve for a 3.5 EV/Sales multiple, using a 6.62% Weighted Average Cost of Capital.
Using these assumptions, our system outputs a price target of $17.05, representing a potential 5.34% gain.
The EPS CAGR for the next 5 years is almost flat, at -7%, assuming a further shareholder dilution of 165% over the next 5 years.
Technical Analysis
Assumptions:
Price Target set at $17.05
CAGR set at -7%
Results:
Trading Range: $8.33 - $39.19 (very wide due to numerous uncertainties)
Value Target: $10.5
Break above $16.72 could signal run-up to $27
Failure to break will keep price in recent range
Conclusion
At current prices, we will assign a HOLD rating on this stock. The short-term risk-reward is balanced. An economic “soft landing” will help future prospects enormously. However, even a retest of recent lows will send AFRM in a 50% drawdown. If an investor can stomach these risks, then upside could indeed be worth it.
You can find a table of all published stock reports and ratings here. You can also request a similar stock report for any ticker, using the same page.
AFRM - Affirm Holdings INC
Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.