Legacy payment options, archaic systems, and traditional risk and credit underwriting models have become almost unacceptable in today’s businesses. Affirm Holdings (AFRM) specializes in solving the problems related to legacy infrastructure that does not support the innovation required for modern commerce to evolve and flourish.
The company’s platform is designed to address these problems through its point-of-sale payment solutions, which operate on the principles of simplicity, transparency, and putting people first.
Since the company’s founding, Affirm has charged $0 in late fees for missed payments, meaning it never profits from consumers’ mistakes. AFRM also tries to be as transparent as possible in its product offerings.
For this reason, the company has been well set up for long-term, sustainable success. This is certainly the case over the past few years, anyhow. I am neutral on Affirm. (See Analysts’ Top Stocks on TipRanks)
What’s the Better Mousetrap?
As most investors are likely well aware, the “buy now, pay later” (BNPL) space is very crowded nowadays. Legacy payment methods such as credit and debit cards provided by major banks still account for a significant chunk of the market. Technology-driven solutions such as those of Visa (V) and Mastercard (MA) also compete with Affirm.
What differentiates Affirm’s business model is that the company benefits from self-reinforcing network forces, which bolster with every transaction.
However, this is not just about Affirm. Affirm’s customers also benefit from the platform’s innovative tools, which allow them to build personalized and scalable products, boosting sales prospects. One such example includes Affirm having the ability to increase AOVs (Average Order Value) and encourage higher sales conversion for merchant businesses. This is powered by Affirm’s rich data and analytics, such as consumers’ purchase patterns.
Recent Results
The company just recently released its FQ1 results, with revenues skyrocketing 54.8% year-over-year to $269.4M. Active consumers increased 124% to 8.7 million, or 22% sequentially. Transactions per active consumer also improved 8% to 2.3 as of the period’s end.
The company is also seeing Q2 revenue reaching $320 million to $330 million, well above the consensus estimates of $296 million. Fiscal 2022 revenue is guided to $1.23 billion to $1.25 billion versus the $1.2 billion consensus estimate.
Among the company’s other announcements, the most interesting one concluded the company’s expanded relationship with Amazon. Affirm will be commonly available to facilitate all eligible purchases of $50 or more on Amazon.com.
Further, consumers will have the option to divide the total cost of eligible purchases into monthly payments at checkout with no late or hidden fees, ever.
As per the agreement, “until January 2023, Amazon will be subject to certain restrictions on providing other installment products in the U.S. by other BNPL providers.” This is massive news because it speaks volumes about the platform’s strength. Amazon could have built that from scratch at its current phase. Hence, Affirm’s expertise is truly hard to replicate in the industry at this point, apparently.
Valuation
As far as the valuation goes, Affirm remains unprofitable, reinvesting all its cash flow from operations back into the business. It’s, therefore, more accurate to value the business based on its sales.
At a forward price/sales ratio of around 33 when looking at June 2022 estimates, the stock is definitely pricy. Still, this is a high-margin industry which could justify the multiple at Affirm’s current growth level. That said, the stock doesn’t present a compelling buying opportunity too. It is for this reason that I am neutral on the stock.
Wall Street’s Take
Turning to Wall Street, Affirm Holdings has a Moderate Buy consensus rating, based on seven Buys, four Holds, and one Sell assigned in the past three months. The average Affirm Holdings price target of $169.18 implies 16.6% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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