Shares of fintech company Affirm Holdings (AFRM) jumped in value, adding a hefty 33.8% in premarket trading on Friday. It has given up some of those gains so far, but the stock is still up over 28%. The company’s earnings report led the way in providing impetus for further investment.
I’m cautiously bullish on Affirm Holdings. It’s likely to take the same beating that a lot of retail operations will take in the near term, especially with a very likely recession ahead. However, after the fact, it might well emerge as one of the big names in connecting e-commerce to the typical end-user.
The last 12 months for Affirm have been an uphill ride followed by an even greater downhill crash. This time last year, Affirm Holdings was hovering around the $50 – $70 per share level before a massive updraft in late August sent the company spiking.
After clearing the $160 per share level, the new highs proved utterly unsustainable. A multi-month slide began, bringing the share to under $14 just yesterday.
The latest news of Affirm’s earnings report gave investors new hope. While the company posted a loss of $0.19 per share, that loss was much less than analysts projected. The Zacks consensus looked for a loss of $0.45 per share.
Additionally, the company offered a beat on revenue, bringing in $354.76 million in revenue. That beat the Zacks consensus by 5.21%. Affirm also offered hope for its future in extending its agreements with Shopify (SHOP).
Wall Street’s Take
Turning to Wall Street, Affirm has a Moderate Buy consensus rating. That’s based on six Buys, five Holds, and two Sells assigned in the past three months. The average Affirm Holdings price target of $49.38 implies 113.3% upside potential.
Analyst price targets range from a low of $17 per share to a high of $80 per share.
Investor Sentiment Proves Surprisingly Mixed
The TipRanks Smart Score for Affirm Holdings currently stands at a 2 out of 10. That’s a clear “underperform” and a sign of clear risk. However, investor sentiment overall isn’t quite so clear itself. There’s a strange mix of positive and negative sentiment in play.
The biggest negative sign comes from hedge fund involvement. Based on word from the TipRanks 13-F Tracker, hedge fund involvement in AFRM has declined substantially. There was a small decline in involvement between September 2021 and December 2021, as shares went from just under 2.6 million to just under 2.55 million.
The decline between December 2021 and March 2022, however, eclipses that figure. In March 2022, hedge funds held just over 721,000 shares.
However, what shares the hedge funds abandoned were taken up quickly by Affirm insiders, who bought at a brisk pace. Insider trading at Affirm is heavily buy-weighted. In the last three months, insiders placed 20 buy transactions. That’s it. Not one insider sold shares in the last three months.
That picture changes somewhat over the last 12 months, but not in overall sentiment. Buy transactions again outpaced sell transactions, but this time by 69 to 28.
As for retail investors who hold portfolios on TipRanks, sentiment overall is down but recovering. In the last 30 days, TipRanks portfolios that included Affirm were down 1.8%. In the last 30 days, however, that’s up 0.1%. Meanwhile, Affirm’s dividend history has little bearing here, as its first dividend payment is still forthcoming.
A Short-Term Disaster, a Long-Term Winner?
Affirm did indeed post some wins with its latest numbers. Additionally, that partnership with Shopify is likely to do it some good. All of this is true, but it’s far from the complete picture.
Affirm’s wins came mainly from the fact that it didn’t lose quite as bad as analysts projected would be the case. That’s not so much a win as it is a lucky break. The win on revenue, however, is a pure win.
There is good news to come for Affirm. Its primary model operates as a “buy now, pay later” (BNPL) operation, which gives it a better chance than average of drawing more customers in a recessionary environment. We’ve already seen how consumers have little trouble going into debt.
Credit card use is on the rise, at least in the U.S., and the numbers are substantial. One report from Bankrate.com’s Ted Rossman puts the average debt at $5,525.
Thus, a BNPL operation like Affirm might find itself particularly well-used. Customers still want to buy new things and nicer things; that’s a universal quality of consumerism. Affirm can help make that happen, and that makes it attractive.
However, that also puts it in something of a bad position. Being a buy now pay later operation implies that people will have the money “later” to pay. If “later” comes and the money doesn’t, then the bottom falls out of Affirm’s entire operation.
For that to truly go wrong, though, more customers have to fall through on the “later” part than those that don’t. Given that Affirm has a range of partnerships—including with big names like Amazon (AMZN) and Walmart (WMT)–the odds of all, or even a majority of these payments falling through is comparatively slim.
Diversification of risk usually works about as well as diversification of product lines; it protects against complete loss but expects a certain amount of current loss.
Thus, for right now, I’m cautiously bullish on Affirm Holdings. It’s diversified its microloan patterns fairly broadly, thanks to its various partnerships. It’s going to be hit by recessions and reduced spending, but it’s spread out its operation so far that the hit is likely to be distributed and have less of an impact.
With Affirm also trading well under its average price target and close to its lowest targets, it may be a good time to buy a piece of a company that’s likely to do a lot better after the recessionary environment has passed.
Affirm Holdings has great potential ahead of it, but the “cautious” part of “cautiously bullish” comes in in the short term. The company’s going to have to get through a period of reduced spending and increased bad loans to get to the good part, after all.
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