Affirm Holdings stock is experiencing a drop in value as competition in the Buy Now Pay Later market heats up and interest rates impact profit margins.
Analyst Downgrades Affirm Stock
Kevin Barker, an analyst at Piper Sandler, downgraded Affirm stock (ticker: AFRM) from Neutral to Underweight while maintaining a price target of $11. Barker adjusted his fiscal 2023 estimates, projecting a loss of 36 cents per share on revenue of $1.55 billion, compared to a loss of 33 cents per share on revenue of $1.56 billion. He also revised his fiscal 2025 estimates to earnings of 4 cents per share on revenue of $1.89 billion, down from earnings of 9 cents per share on revenue of $1.92 billion.
Market Reacts
Despite Barker’s downgraded outlook, the current market price for Affirm stock is significantly higher than his target price. As of Thursday, the stock has dropped by 12% to $13.62 per share, marking its largest percentage decrease since February 9th. Nonetheless, the stock has still managed to achieve a year-to-date gain of 41%.
Reliance on Loan Sales Causes Concern
Barker expressed concern that Affirm relies heavily on loan sales to generate a substantial portion of its revenue. However, as higher interest rates and wider credit spreads impact pricing in the whole loan market, the company has increasingly been holding loans on its balance sheet.
Financial Performance
In the company’s fiscal third quarter report, released in early May, Affirm disclosed that $33 million of its total revenue of $381 million came from gains on loan sales. This figure fell short of Wall Street’s expectations and represented a decline from the $52 million generated during the same period the previous year. While total revenue exceeded estimates, the decrease in gains from loan sales raised concerns.
Affirm is facing significant challenges as it navigates the competitive Buy Now Pay Later landscape and manages the impact of interest rates on its profitability.
Affirm Faces Challenges in a Competitive Market
Introduction
In the face of persistent high interest rates, Affirm (AFRM) may encounter increased pressure due to lower gain on sale revenue and higher funding costs for loans held on its balance sheet. This has led some experts to recommend selling the stock.
Challenges Ahead
While Affirm has not provided an immediate comment, the company acknowledges in its fiscal third-quarter letter to shareholders that higher interest rates and credit spreads could pose a challenge to their revenue. As a percentage of gross merchandise volume, revenue less transaction costs (RLTC) may be affected.
The Rise of Competition
One significant risk to Affirm is the increasing competition in the market. Buy Now Pay Later (BNPL) services gained popularity during the pandemic, allowing people to make purchases without taking on additional credit card debt. However, companies like PayPal Holdings (PYPL) and Apple (AAPL) have now entered the BNPL space, directly competing with Affirm.
Longer Duration Products
With competitors focusing on short-duration products that cater to smaller order sizes, Affirm is leaning towards longer-duration products to differentiate itself. However, this shift may increase credit/rate sensitivity and result in a lower multiple on the stock over the long term.
In conclusion, Affirm faces challenges from both higher interest rates and a competitive market. As competitors enter the BNPL space and prioritize different product offerings, Affirm must navigate these challenges to maintain its position in the market.
