Case Study on Affirm (AFRM) with Nobias technology
During the second half of 2021, Affirm (AFRM) shares rose from approximately $50.00/share to its current 52-week high of $172.65. However, throughout 2022 the sentiment has turned bearish for AFRM shares, which are now down by more than 74% on a year-to-date basis.
AFRM posted fiscal Q4 earnings this week and although the company beat Wall Street’s expectations for Q4 sales, poor forward looking guidance spooked investors, causing shares to crater. Affirm shares fell by 19.47% this week.
However, after this precipitous sell-off, the credible analysts that Nobias tracks remain bullish on shares, with an average price target that points towards strong double digit upside potential. Dave Kovaleski, a Nobias 4-star rated author, published an article at the Motley Fool on Monday this week, highlighting some of Affirm’s recent share price weakness.
AFRM Aug 2022
Kovaleski pointed towards a shift in the macro environment, especially regarding the Federal Reserve’s hawkish stance, as an ongoing headwind for growth stocks like AFRM. He wrote, “The overall decline likely stems from renewed concerns about inflation. While the inflation rate dropped in July, sparking some hope that the Federal Reserve might ease up on its aggressive posture on interest rate hikes, the minutes of the July Fed meeting, released last week, indicated that the Fed would not pull back on rate hikes until inflation came down substantially. That, in turn, stoked fears of an economic slowdown, which would not be good for payment companies like Affirm.”
Rising rates have been a headwind throughout 2022 and Nobias 5-star rated author, Shrilekha Pethe, touched upon this in a report that she published at Nasdaq.com after AFRM’s Q3 report back in July. Regarding headwinds created by a tough macro environment for Affirm, Pethe said, “Another major concern among investors has been that as cash becomes tight, BNPL borrowers could default on their payments.” “However,” she continued, “Affirm believes it is well-placed to weather the potential storm.”
Pethe stated, “Affirm’s management pointed out that, unlike many of its competitors, the company does not charge a late payment fee, which it says would appeal to consumers during a downturn. The company also stated that it does not expect rising interest rates to immediately ramp up its borrowing costs.”
Despite management’s confidence, it appears that AFRM is struggling to execute. Chris Lau, a Nobias 4-star rated author, published a post-earnings report on AFRM stock at Seeking Alpha, where he stated, “In after-hours trade after the Q4 report, Affirm issued guidance for Q1/2023 and the full year of 2023. This disappointed investors.”
Regarding AFRM’s Q4 results Lau wrote, “In the last quarter, Affirm posted revenue growing by 39.1% Y/Y to $365.13 million. It lost 65 cents a share on a GAAP EPS basis.” He continued, “Active consumers and gross merchandise volume both soared by 96% and 77% year-on-year, respectively.”
Highlighting losses, Lau wrote, “The net loss increased from $123.4 million last year to $186.4 million. This weak result will deter investors. The bearish short interest is 20.23%. Short-sellers are ahead by 57% (before the post-market selling).”
Touching upon the disappointing forward guidance figures, Lau said, “For the first quarter, the revenue of $345 million to $365 million is below the consensus of $390.87 million.” He also stated, “More worrisome is the adjusted operating margin forecast of negative 12% to negative 10%.”
Looking out over the coming year, Lau also put a spotlight on disappointing top-line expectations writing, “Affirm's 2023 revenue growth outlook is not enough to satisfy shareholders. The company's revenue forecast of $1.625 billion to $1.725 billion is below the consensus estimate of $1.9 billion.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
But, looking further out into the future, Lau sees strong growth tailwinds for a name like Affirm which is a major player in the buy now, pay later (BNPL) industry. He said, “Stretched for disposable income, BNPL (buy now, pay later) will become a critical driver to stimulating spending online. Affirm could potentially double its revenue. BNPL will more than double from 3.8% of e-commerce spending in 2021 to 8.5% by 2025.”
Yet, even with this in mind, Lau provided a neutral stance in his conclusion. He wrote, “Affirm's post-earnings sell-off is warranted. Markets will adjust for the weaker revenue outlook. The high cash burn rate increases the risk of the company raising cash.”
All in all, Lau stated, “In reflecting the opportunities against its near-term risks, I rate Affirm stock between a hold and a buy. The credible author community that the Nobias algorithm tracks appears to share this tepid outlook. 57% of recent articles published on AFRM shares have expressed a “Bearish” sentiment.
However, the credible Wall Street analysts that Nobias tracks are much more bullish. After AFRM posted its Q4 earnings, Andrew Jeffrey of Truist, a Nobias 5-star rated analyst, lowered his price target for AFRM shares from $55.00 to $45.00. This reduced the average price target amongst the credible analysts that Nobias follows to $35.00 for Affirm shares. AFRM ended the week with a $24.57 share price. Therefore, that $35.00/share credible analyst average price target represents upside potential of approximately 42.5%.
Disclosure: Nicholas Ward has no AFRM position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.