This year witnessed an extraordinary surge in Affirm Holdings (NASDAQ:AFRM) stock, delivering a fivefold increase for investors in 2023. Despite this remarkable performance, the bulk of the gains materialized in the latter half of the year, with the rally gaining significant momentum in December.
Optimistic Affirm stockholders anticipate a continued upward trajectory, fueled by Mizuho analyst Dan Dolev’s recent decision to more than double the target price for the buy-now-pay-later (BNPL) company to $65. This implies a noteworthy premium of 30.7% over current prices. In contrast, Morgan Stanley took a more cautious stance, downgrading the stock to “equal weight” due to perceived unfavorable risk-reward dynamics.
Let’s delve into the factors shaping Affirm’s stock movement, examining both the positive and concerning aspects to gauge whether the rally still has momentum.
Why Affirm Stock is on the Rise
- Impressive Financial Performance: Affirm’s stock gained momentum following robust fiscal Q4 2023 and Q1 2024 earnings. The company exceeded revenue and profitability expectations, showcasing impressive operating metrics such as active consumers and merchants on its platform. Notably, Affirm achieved an adjusted operating profit in the fiscal first quarter of 2024 without compromising credit quality.
- Expanded Partnerships: Affirm strengthened its ties with major players like Amazon and Walmart in 2023. The expanded partnership with Amazon extended Affirm’s solutions to the B2B store, while the collaboration with Walmart made Affirm’s BNPL solutions available at self-checkout kiosks in over 4,500 stores.
- BNPL Industry Uptick: The buy-now-pay-later industry experienced a surge during the 2023 Black Friday and Cyber Monday sales, defying economic slowdown concerns. Higher BNPL purchases contributed to record-breaking sales, with Adobe forecasting November as the best month on record for the industry.
- Federal Reserve’s Dovish Stance: Affirm, like other fintech plays, benefited from the Federal Reserve’s dovish pivot. As the Fed signaled a shift towards lower interest rates, interest rate-sensitive names, including Affirm, experienced a rally.
Affirm’s Outlook for 2024
Affirm’s 2024 outlook appears positive, buoyed by expanded partnerships and anticipated rate cuts. Analysts predict a 27.6% increase in revenues for the fiscal year, with narrowing losses. The dovish stance of the Federal Reserve is expected to support growth in the BNPL industry throughout 2024, given the current macroeconomic environment.
Despite these positive indicators, Wall Street’s sentiment toward Affirm heading into 2024 is somewhat reserved. With a consensus rating of “Hold” from 18 analysts covering the stock, there seems to be a discrepancy between Affirm’s optimistic business outlook and its current ratings. Only three analysts rate AFRM stock as a “Strong Buy,” while the majority opt for a “Hold” rating.
Valuation Concerns
However, a closer look at Affirm’s valuations reveals potential concerns. The stock currently trades at a next 12-month price-to-sales multiple of just over 7x, the highest since April 2022. This period coincided with the start of the Fed’s rate-tightening cycle, which commenced with a 25 basis points rate hike in March.
Is It Too Late to Invest in Affirm?
While Affirm’s positive business outlook for 2024 is evident, the stock’s valuations appear stretched, trading at the highest multiples in recent times. Considering these factors, initiating new positions in Affirm stock at this juncture may be untimely. It might be prudent to consider booking profits after the impressive rally in the BNPL sector. Nonetheless, retaining some shares for the long term could be a strategic move, especially if Affirm experiences brief rallies due to expanded partnerships or further dovish signals from the Federal Reserve.
Featured Image: Megapixl
