Affirm Stock: Chasing Growth Didn’t Work (NASDAQ:AFRM)

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The once hyped fintech concept BNPL (Buy Now, Pay Later) has suddenly lost the interest of investors. Confirm stocks (NASDAQ:AFRM) was the poster child for the overhyped concept and now the stock has collapsed due to concerns about higher costs and limited profits. my investment thesis is more neutral on the stock as competitive pressures here are likely to dissipate, but the stock has already rebounded strongly from the lows.

No lack of growth

Although the BNPL concept is not really new, Affirm went public in early 2021 and was quickly recognized as a fintech pioneering a new concept of finance. Amazingly, the IPO started at $49 and eventually surged to over $170 late last year as e-commerce demand surged and the company signed a slew of new online retailers. The stock is now below the IPO price after a year of very strong growth.

Affirm currently runs this type of business out of favor in the market. The fintech produced accelerating loan volume in FQ3’22, represented by GMV growth of 73%, followed by slower revenue growth of just 54% in the quarter, followed by even slower net revenue (revenues minus transaction costs) that grew just around grew 37% to just $182.4 million.

Proceeds minus transaction costs slide

Source: confirm presentation FQ3’22

At its peak, Affirm was valued at a market cap of nearly $50 billion, but the company doesn’t even generate $200 million in quarterly net income after signing deals with the two major online retail platforms. While Affirm is primarily focused on growing its revenue metrics, the company has had a very high spend issue, which highlights its primary concern Amazon (AMZN) deal originally.

As detailed below, transaction costs include provisions for credit losses, financing costs and loan processing and servicing costs. Affirm spends about 50% of revenue on transaction costs on a quarterly basis. In FQ3’22, revenue was $354.8 million and transaction costs were $172.3 million, or 49% of revenue.

OpEx table

Source: Confirm third quarter 2022 earnings release

Investors need to understand that either Affirm is a relatively low gross margin company or the company has low adjusted net income. The fintech doesn’t spend much time discussing the true operating costs of the company.

For the March quarter, operating expenses were $409.0 million. Sales and marketing spend increased nearly $100 million year over year to $156.2 million, indicative of the cost of acquiring customers on platforms like Amazon and Shopify (BUSINESS). Although most of these costs relate to stock-based compensation expense and warrant costs, the numbers reflect the impact on diluted share count. Non-GAAP operating expenses drop by nearly $220 million to only about $180 million x if you exclude those costs, but those expenses are still very important in evaluating a fintech company that offers online lending offers.

OpEx foil

Source: confirm presentation FQ3’22

Affirm received the massive spike in active traders, which rose from 12,000 in last FQ3 to 207,000 in the last quarter, but the earnings picture didn’t improve on that. The stock plummeted with a goal of only delivering adjusted operating income through July 1, 2023.

Dead cat jump

Many struggling stocks like Affirm have rallied significantly from the lows, which has reduced the appeal of chasing the stock here. The stock has a listed market capitalization of $7.5 billion based on a listed share count of 290 million shares.

In reality, Affirm is facing significant dilution, due in part to the Amazon warrant along with other stock options and restricted stock units. The company has the potential for over 50 million additional diluted shares, adding another $1.3 billion to its final valuation, though many of the potential shares, like Amazon’s 15 million warrants, are not exercisable until much higher stock prices .

Since Affirm hasn’t forecast much earnings in years, the stock remains a P/S story. The stock is much better valued here at 4 times forward selling, although keep in mind that actual net earnings are about half of current FY23 earnings estimates of $1.9 billion.

Data from YCharts

The stock has likely already rallied this cycle, considering the big upside in Amazon and Shopify deals factored into the FY23 guidance. Affirm isn’t even expected to report annualized adjusted operating income before the end of next fiscal year.

Bring away

The key takeaway for investors is that Affirm has already rebounded nearly 100% from recent lows. The BNPL product has a questionable business model of offering the solution online due to Affirm’s high cost structure.

Investors shouldn’t chase the stock here, even though Affirm is still trading well below its IPO price.

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