Affirm’s stock (NASDAQ:AFRM) surged by more than 28% on Friday, August 25, applauding the fintech firm’s robust fiscal fourth-quarter earnings. Following this recent surge, the stock has witnessed an impressive 80% gain for the year. However, it’s essential to note that Affirm is still significantly below its record peak of $168.52 achieved in November 2021, a time when investors eagerly invested in growth stocks, anticipating the bullish trend to continue.

The company’s journey into the public market commenced in January 2021, with an IPO priced well above its initial range at $49 per share. It’s noteworthy that Affirm had previously postponed its IPO in 2020, potentially influenced by the soaring successes of DoorDash (NYSE:DASH) and Airbnb (NASDAQ:ABNB) during their IPOs. Affirm aimed to ensure its IPO investors received favorable value.

Affirm’s Stock Value in Comparison to 2021 Highs

Despite the delayed IPO and elevated pricing, early supporters of AFRM demonstrated their confidence, propelling the stock to a 90% gain on its market debut. However, the trajectory for growth stocks like Affirm turned adverse in 2022. The Federal Reserve implemented an assertive policy-tightening approach, leading to the hike of its benchmark lending rate to 5.25%-5.50%, causing a decline in growth stocks.

Understanding Affirm’s Stock Decline

Affirm faced challenges triggered by the Federal Reserve’s rate hikes for several reasons. Firstly, growth stock valuations diminished due to increased interest rates. Additionally, being a buy-now-pay-later (BNPL) company, Affirm experienced higher funding costs as U.S. interest rates surged from historically low levels to a 22-year high within a short span of 18 months. Lastly, the Federal Reserve’s rate hikes contributed to a slowdown in U.S. consumption, impacting Affirm’s performance, albeit not to the extent desired by the Federal Reserve.

Furthermore, Affirm faced obstacles due to complications at Peloton (NASDAQ:PTON), its significant client. Entry of strong competitors like Apple (NASDAQ:AAPL), Square (NYSE:SQ), and PayPal (NASDAQ:PYPL) into the BNPL sector intensified competition, coinciding with increased regulatory scrutiny of BNPL companies by U.S. authorities.

Key Insights from Affirm’s Q4 Earnings

Despite these challenges, Affirm achieved remarkable results in its fiscal Q4 earnings. Revenues surged by 22% year over year to reach $446 million, comfortably surpassing analysts’ projections of $406 million. Affirm’s revenue forecast for fiscal Q1 2024 ranged from $430 million to $455 million, exceeding analysts’ expectations.

Notably, despite deteriorating credit market conditions, Affirm reported a 30 basis points decrease in delinquencies for the quarter after adjusting for Peloton and Pay in 4 loans. The company’s Q4 loss per share was 69 cents, narrower than analysts’ anticipated 85 cents. Additionally, Affirm’s GAAP operating loss margin of 55% marked its lowest in seven quarters. The company also exhibited positive adjusted operating margins in the quarter and foresees sustaining positive annual operating margins.

Analyzing Affirm’s Stock Outlook Following Q4 Earnings

Despite exceeding expectations in Q4 earnings, analysts remained somewhat reserved in their response. Although Wedbush and Morgan Stanley slightly increased their target prices, they maintained underperform and equal weight ratings, respectively.

Wall Street’s consensus rating for Affirm is ‘Hold’, with only 3 out of 12 analysts covering the stock designating it as a ‘Strong Buy’. A lone analyst sees it as a ‘Moderate Sell’, while 4 analysts rate it as a ‘Strong Sell’. The mean target price of $14.31 suggests skepticism, trailing 18% below present levels. Nonetheless, a bullish perspective is evident with a high target price of $24, standing at a substantial 37% above the current valuation.

Prospects and Challenges for Affirm

A comprehensive evaluation reveals several opportunities and challenges facing Affirm. The BNPL industry is expanding rapidly, and Affirm is enhancing its reach through strategic partnerships. The company is particularly aiming to expand in offline retail, recognizing that only 5% of its gross merchandise value originates from this channel, despite offline retail accounting for 15% of total U.S. retail spending.

Financially, Affirm succeeded in achieving its adjusted operating margin target despite the surge in U.S. interest rates. The launch of the Affirm card, embraced by over 300,000 active users by mid-August, showcases its potential. Affirm card users generate three times higher transaction volume compared to other platform users on average.

However, Affirm is not without challenges. It contends with fierce competition, economic deceleration, and an unwavering Federal Reserve stance on rate cuts. Additionally, the resumption of student loan repayments could decrease purchasing power.

Investment Perspective on Affirm

While the BNPL industry holds promise, the current environment poses challenges. Despite growing competition, Affirm has demonstrated resilience. Trading at a next-12-month price-to-sales multiple of 2.72x, significantly lower than the historical average of 10.64x post-IPO, the stock appears intriguing. However, the current market dynamics, affecting even established fintech players like PayPal, should be considered.

In summary, while Affirm might not be an immediate ‘buy’, it’s a stock worthy of monitoring and possibly considered as a ‘buy-on-dips’ candidate. A positive shift in the Federal Reserve’s tightening strategy, anticipated in 2024, could favorably impact companies like Affirm.

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