Affirm Holdings Inventory: Slowing Development Is A Huge Downside (NASDAQ:AFRM)

Affirm Holdings, Inc. (NASDAQ:AFRM) is at a fork within the highway. The fintech has misplaced nearly all of its market valuation within the final yr as progress has slowed and shoppers have lowered their spending.

As a outcome, Affirm issued a really disappointing forecast for 2023, and the fintech skilled a big slowdown in energetic service provider progress within the fourth quarter. On the similar time, the fintech’s losses continued to develop, placing a pressure on the corporate’s market valuation.

Lastly, regardless of decrease progress projections, Affirm stays extremely valued. Consequently, regardless of a considerably decrease inventory value, I do not imagine Affirm Holdings, Inc. is at present a compelling purchase.

Development Is Slowing And It Poses A Downside For The Fintech’s Valuation

The growth of Affirm is inextricably linked to the growth of the eCommerce economic system. Affirm’s gross merchandise worth grows as extra transactions are processed. With a rise in gross merchandise worth, which is actually the greenback whole of all transactions, Affirm’s probabilities of finishing a purchase now pay later (“BNPL”) transaction enhance. The pandemic offered a big enhance to eCommerce transactions, however progress for Affirm slowed considerably final yr, and the close to future doesn’t look promising.

One instance is the slowing progress of energetic retailers providing Affirm’s BNPL fee options to clients. Within the second fiscal quarter, 243K energetic retailers used Affirm’s BNPL merchandise, a 2K lower QoQ. The decline in service provider accounts was primarily as a result of churn within the service provider cohort with lower than $1K in gross merchandise worth, however the slowdown is clearly a significant concern.

Following the pandemic, Affirm’s gross sales progress has additionally begun to gradual considerably. Affirm’s gross sales progress actuality is tough to get enthusiastic about, despite the fact that the fintech continues to be rising its gross sales and gross merchandise worth.

Affirm Holdings, Inc. generated $400 million in gross sales in 2Q-23, representing solely 11% YoY progress. Affirm’s gross sales had been up 77% a yr in the past, and the slowdown is having a big adverse influence on the fintech’s valuation.

Along with slowing progress, I see a urgent subject with the fintech’s profitability. Affirm just isn’t solely not worthwhile when it comes to working or web revenue, however its losses are rising.

Affirm misplaced a staggering $360 million in 2Q-23, bringing fiscal 2023 losses to $647 million after solely six months. This can be a downside as a result of, as progress slows, traders have gotten extra involved with a fintech’s profitability.

Lengthy-Time period Monetary Outlook, Development Assumptions, And Gross sales A number of

In the course of the pandemic, Affirm’s purchase now pay later enterprise mannequin noticed supercharged progress charges, and the market, together with myself, made the error of projecting this progress out in a linear style in 2021 and 2022.

As 2022 demonstrated, progress for the BNPL supplier has slowed dramatically, and the long-term monetary outlook is now not as interesting because it was a yr or two in the past. Affirm continues to be anticipated to ship stable income progress within the 20-30% vary, however its valuation now seems stretched.

With slowing progress affecting the fintech trade, the market has revised its progress forecast for 2023. The market anticipates 12.9% gross sales progress within the present fiscal yr, down from round 30% the final time I mentioned the fintech’s worth proposition. A recession in 2023 might exacerbate the already dire state of affairs for the fintech.

Based mostly on gross sales, the fintech continues to be extremely valued: this yr’s estimated gross sales of $1.52 billion suggest a gross sales a number of of 1.8x. Given Affirm’s rising working losses, it is a excessive a number of to pay for traders.

Why Affirm Holdings Might See A Larger Valuation

Affirm Holdings, Inc.’s valuation might rise if the financial setting improves sufficient for the central financial institution to decrease rates of interest and convey inflation beneath management. All of this might encourage shoppers to spend cash once more and assist BNPL transactions.

Affirm is actually a fintech wager on the expansion of the eCommerce economic system, so something that will increase shopper confidence sooner or later is more likely to end in elevated spending and transaction volumes. A recession, however, would virtually actually end in yet one more low gross sales forecast.

My Conclusion

Affirm Holdings, Inc. is in a bind: the market has turned towards the fintech at exactly the fallacious time. Affirm has aggressively invested in growth, however inflation and rates of interest have thrown a wrench within the fintech’s BNPL enterprise.

When service provider account progress and shopper spending decelerate, the Affirm Holdings, Inc. valuation seems to be very excessive based mostly on gross sales.

Proper now, I proceed to imagine that the danger/reward ratio is unbalanced, and {that a} potential recession in 2023 might do extra hurt to each Affirm Holdings, Inc.’s enterprise mannequin and the fintech’s valuation.