Affirm: Set For A Rebound

May 22, 2022 7:01 AM ETAffirm Holdings, Inc. (AFRM)9 Comments5 Likes
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  • Affirm Holdings’ stock has been caught in a down-channel.
  • The stock recently made a new low, but bounced upwards after earnings.
  • All of Affirm’s major performance metrics are in an upswing.

BNPL or buy now pay later message on computer Keyboard Key

Andres Victorero/iStock via Getty Images

I placed another purchase order for Affirm Holdings, Inc. (NASDAQ:AFRM) last week, and despite the market's surge on 3Q-22 news, the stock still has a lot of upside.

Because fintech businesses are now being avoided, there is a potential to double down on BNPL companies who can demonstrate strong customer account and revenue development. Affirm also increased its guidance for 2022. Affirm's revenue growth could be accelerated by new agreements with retail companies.

The Dawn Of A New Market Opportunity

As more merchants offer easy financing solutions for shoppers who are short on cash and prefer to make a purchase on simple finance plans, buy now, pay later suppliers are finding strong market demand for their services.

The BNPL opportunity is tied to the overall growth of the eCommerce business, and merchants are eager to offer their clients BNPL products. The buy now, pay later market is rapidly expanding, providing Affirm and its competitors with a possibility for exponential growth.

Affirm is making inroads into the massive BNPL market in North America. So far, the BNPL company has a relatively tiny part of the BNPL market, indicating promising long-term growth prospects. The North American eCommerce market is expected to be worth $900 billion in 2021, yet Affirm only accounts for a small portion of this total.

Affirm - Large Expanding Market Opportunity

Large Expanding Market Opportunity (Affirm Holdings)

Growing demand for BNPL products in the eCommerce space boosted Affirm's customer accounts and revenues to new highs in the fiscal quarter ending March 31, 2022. While many investors have been hesitant to buy and hold fintech companies recently, Affirm is generating persuasive results in light of recent performance deterioration and PayPal's (PYPL) slashed 2022 revenue guidance.

Affirm’s key performance metrics across the board showed strong business momentum in the last quarter. Gross merchandise volume was up 73% YoY to $3.9 billion, active customers surged 137% YoY to $12.7 million and sales increased 54% YoY to $355 million. Active customers and transaction per active consumers actually saw more robust growth in 1Q-22 that in the same period in the year-ago quarter. The key performance metrics displayed in the chart below suggest that Affirm has favorable business trends to exploit.

Affirm Third Quarter FY'22 Highlights

Third Quarter FY'22 Highlights (Affirm Holdings)

What Will Drive Growth At Affirm Moving Forward

In two simple words: Retail partnerships.

Affirm is particularly appealing as a fintech/BNPL investment due to the opportunity of adding scale to the business. BNPL is gaining traction through agreements with corporations such as Amazon (AMZN), Shopify (SHOP), and Walmart (WMT). These organizations serve millions of clients every day, and the integration of BNPL products into their websites provides Affirm with a growing potential that would be difficult to achieve if Affirm had to build a merchant network from start. According to Affirm, the company's BNPL solutions span 60% of the U.S. retail sales industry, giving the fintech a significant competitive advantage.

Affirm Retail Partnerships

Retail Partnerships (Affirm Holdings)

Affirm formed a collaboration with Amazon in 2021, and the partnership has been a huge success for Affirm. Affirm's gross merchandise volume increased significantly, notably after the relationship with Amazon began in 2Q-22.

Affirm - Collaborations Driving Growth

Collaborations Driving Growth (Affirm Holdings)

Affirm Raises 2022 Guidance

Affirm's revenue forecast for 2022 is $1.33-1.34 billion, an increase from the previous forecast of $1.29-1.31 billion. The increased forecast is being driven by a more optimistic estimate of gross merchandise volume connected to the launch of Affirm's BNPL product on Amazon.

In comparison to 2021, the current guidance predicts a 53% YoY increase in revenues. The gross merchandise volume is now estimated to be between $15.04 billion and $15.14 billion, up from $14.58 billion to $14.78 billion previously.

Affirm demonstrates confidence in its revenue trajectory because this is not the company's first time raising its forecast. But I see one issue with Affirm that could become a greater issue if the economy enters a recession in 2022.

One Potential Problem/Risk For Affirm

Many epidemic winners, including Affirm and other fintechs, have witnessed stock price declines in 2022. Affirm's stock price dropped 77% in 2022, and recession fears are likely to have played a role.

One worry I have with Affirm is the rising tendency of delinquencies, which could worsen if the health of American customers deteriorates. A recession could precipitate such a scenario. Delinquencies at Affirm (as depicted in the chart below) surged in 2022, surpassing the level of delinquencies in the year preceding the pandemic. Delinquency trends in the lending business should be closely monitored by investors since they may indicate future balance sheet issues and larger net charge offs.

Affirm Delinquency Performance

Delinquency Performance (Affirm Holdings)

Attractive Valuation Point

This year has seen a lot of movement in Affirm stock. The stock's year-to-date performance of (77%) is nothing short of a calamity. However, investors are unlikely to ignore Affirm's growth opportunities in the BNPL industry and its retail reach indefinitely. While I wouldn't call the stock cheap, Affirm's value proposition at a P/S-ratio of 5x is far more appealing than it was a year ago.

AFRM PS ratio
Data by YCharts

My Conclusion

Affirm is a pure play bet on the BNPL industry, and it has significant reach through retail relationships, particularly with Amazon. Last week, Affirm released a positive report, and the company continues to experience strong progress in key performance indicators such as gross merchandise volume, customer growth, average payment transactions, and revenues.

Furthermore, Affirm increased their revenue forecast for 2022. The stock isn't cheap, but it's been beaten up sufficiently. I'm taking the long view here and believe AFRM has the potential for a significant return.

This article was written by

On the Pulse profile picture
A financial researcher and avid investor with a keen eye for innovation and disruption, as well as growth buy-outs and value stocks. Keeping an eye on the pace of high tech and early growth companies, I write about current events and the biggest news surrounding the industry, and strive to provide readers with ample research and investment opportunities.

Disclosure: I/we have a beneficial long position in the shares of AFRM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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