Can Affirm Holdings shares be bought now?

Say‘s (AFRM 28.82%) Shares rose 9% during after-hours trading on August 24 after the company Buy Now Pay Later (BNPL) released its latest earnings report. For the fourth quarter of fiscal 2023 (ending June 30), its revenue increased 22% year-over-year to $446 million and beat analyst forecasts by $40 million. Its net loss widened from $186 million to $206 million, or $0.69 per share, but still beat analyst estimates by $0.14.

Affirm is growing, but it is still struggling to prove that its business model is sustainable. Even after its post-earnings rise, it remains almost 70% below its January 2021 IPO price. So should investors bet on the long-term recovery of this BNPL leader?

Image source: Getty Images.

Why did the bulls turn against Affirm?

Affirm’s BNPL platform is aimed at younger, lower-income people who can’t get approved for traditional credit cards. For businesses, it’s touted as a cheaper alternative to credit cards, which charge fees for each transaction.

Instead of processing a payment directly, Affirm approves microloans for clients to break larger purchases into smaller installments. Their shorter term payment plans do not accrue any interest, while the extended plans are offered at higher rates. It does not charge late or hidden fees. That simple approach caught many people and businesses in the pandemic, their growth amplified by the temporary surge in online sales and stimulus-induced spending.

That’s why Affirm’s revenue soared 71% to $871 million in fiscal 2021 (ending June 2021) and grew 55% in fiscal 2022. But in fiscal 2023, its revenue only increased 18% to $1.59 billion. That slowdown was caused by three main challenges.

First, inflation largely dampened consumer spending. Second, Platoon (PTON 5.71%) (Affirm’s main client at the time of its initial public offering) suffered a grueling post-pandemic slowdown. Finally, more diversified tech giants, including PayPal (PYPL 0.79%), Block (SQ 0.41%)and even Apple (AAPL) 1.26%) — expanded into the BNPL market.

As Affirm’s growth cooled and it faced fiercer competition, its net losses nearly quadrupled from $113 million in fiscal 2020 to $441 million in fiscal 2021, then widened again to $707 million in fiscal 2020. 2022 and $985 million in fiscal 2023. All that red ink suggested Affirm didn’t have much pricing power and was probably attracting high-profile merchants like Amazon and Walmart with unbalanced agreements that generate losses.

That combination of slowing growth and mounting losses convinced bulls that Affirm no longer deserved a premium valuation. When Affirm’s shares hit their all-time high of $168.52 on November 4, 2021, his company’s value reached $47.6 billion, or 37 times the revenue it would actually generate in fiscal 2022.

At $15, Affirm has an enterprise value of $7.1 billion, or four times its projected revenue for fiscal 2024. But even at that lower valuation, its own experts aren’t getting used to its stock. Over the past 12 months, its insiders sold more than triple the shares they bought.

But some rays of hope are appearing.

It’s easy to see why the market turned against Affirm, but some green shoots are showing up. It expects its gross merchandise volume (GMV), or the value of all goods sold on its platform, to grow 19% to $24 billion in fiscal 2024. It expects to squeeze roughly the same percentage out of its GMV ( 7.9%) as income. – implying that its total revenue will also grow by around 19% to $1.9 billion. That would mark a slight acceleration from fiscal 2023.

Affirm also ended fiscal 2023 with just 2.3% of its accounts (excluding Peloton and its “Pay in 4” platform) with loans more than 30 days past due. That percentage suggests it won’t be weighed down by late payments anytime soon, but he expects that rate to rise slightly in the first half of fiscal 2024.

Affirm also continues to expand. In the fourth quarter, its number of active consumers grew 18% year-over-year to 16.5 million, while its number of active merchants increased 8% to 254,000. Its transactions per active consumer also increased by 30%.

More importantly, Affirm’s adjusted operating margin turned positive in the fourth quarter. It expects to achieve a positive adjusted operating margin of at least 2% by fiscal year 2024, compared to a negative adjusted operating margin of 4.6% in fiscal year 2023. It is still a long way from achieving profitability based on accounting principles generally accepted (GAAP). , but attributes the improvement in its non-GAAP numbers to its recent cost-cutting measures (including layoffs of nearly a fifth of its workforce), its search for “higher gross margin” merchants and the launch of its own credit cards. debit.

With $2.1 billion in cash, cash equivalents and marketable securities, Affirm won’t go out of business any time soon, even as it continues to fight to cut its GAAP losses.

Is it the right time to buy Affirm?

Affirm’s stock looks less bubbly than it did two years ago, but it still doesn’t look like a bargain. It’s still growing, but it’s not profitable and could struggle to keep up with PayPal, Block, and Apple as they aggressively expand their BNPL ecosystems with loss-making tactics. In other words, I think it’s wiser to stick with any of those more diversified tech companies than to bet on Affirm’s long-term recovery.