Affirm Holdings (NASDAQ:AFRM) stock is zooming higher today, so should investors pile on a winning trade now? Before buying now, take a look at Affirm’s results and think about the challenges of a high-interest-rate environment. A great deal of growth has likely already been priced in, so I am neutral on AFRM stock.
Headquartered in San Francisco, Affirm Holdings provides a digital lending platform that focuses on the “buy now, pay later” or BNPL business. Affirm stock soared in 2021 when interest rates were low and speculative fervor ruled the equities market.
Now, in 2023, it feels like Santa Claus arrived early for AFRM stockholders. That’s fine if you already owned some shares, but what if you’re thinking about taking a share position now? For overeager Affirm Holdings investors, I’ll say that if you buy now, you may end up paying for it later.
Why Did Affirm Holdings Stock Rocket Higher Today?
After looking through the news surrounding Affirm Holdings, it’s hard to fathom why AFRM stock jumped 12% today. The major stock market indexes were basically flat, and there didn’t seem to be a company-specific catalyst for Affirm today.
Granted, Affirm Holdings stock has a beta of 2.96, which suggests that it moves much faster than the stock market overall. Thus, the stock is prone to big daily moves. Still, 12% in a single day is notable.
Furthermore, AFRM stock has gone practically vertical throughout November. This was understandable in early November when Affirm Holdings released its results for the third quarter of Fiscal Year 2024. As it turned out, Affirm reported a loss of $0.57 per share, beating the analyst consensus estimate of a loss of $0.70 per share.
That’s progress, but Affirm Holdings still isn’t profitable. On the other hand, Affirm generated Q1-FY2024 net revenue of $496.5 million, up 37% year-over-year and ahead of Wall Street’s call for $448.5 million. Hence, it’s fair to say that Affirm had a great quarter, even if the company isn’t currently income-positive.
Still, none of this accounts for why Affirm Holdings stock rallied sharply today. Mainly, it appears to be a short-term share-price move based on latecomers piling in. That’s not the best scenario for prudent investors to make their moves.
A Tough Environment for Affirm Holdings
What some stock traders seem to be ignoring is the environment in which Affirm Holdings has to operate as a BNPL lender. Sure, people are shopping now for the holidays and will pay for these purchases later. It appears, then, that the market is pricing in the assumption that borrowers will be willing and able to pay high interest rates and won’t default on their loans.
That’s a bold and risky assumption to make. Americans are great at shopping and spending money, but are they good at paying back what they’ve borrowed? The fact is that U.S. credit card delinquencies are high. Moreover, many Americans are simply defaulting on their commercial banking consumer loans (delinquency rate of 2.53% in Q3, up from 1.93% last year) as well as their auto loans.
Affirm Holdings did a pretty good job of burying its loan delinquency rates by highlighting the company’s growing revenue. Yet, prospective investors always need to check the fine print. Affirm and its customers have to deal with higher-for-longer interest rate policy, and the company will have a tough time justifying its relatively high share price in this environment.
Is AFRM Stock a Buy, According to Analysts?
On TipRanks, AFRM comes in as a Hold based on three Buys, eight Holds, and five Sell ratings assigned by analysts in the past three months. The average Affirm Holdings stock price target is $20.31, implying 30.85% downside potential.
Conclusion: Should You Consider AFRM Stock?
Clearly, the analyst community isn’t as impressed with Affirm Holdings as short-term retail traders appear to be. Frankly, I can’t blame analysts for their lukewarm sentiment on Affirm.
It’s fine to appreciate Affirm Holdings’ top- and bottom-line quarterly beats, and the company’s performance might be able to justify the stock’s sharp rally. That remains to be seen in this challenging high-interest-rate environment, however, so I don’t feel that investors should consider AFRM stock right now.
