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SUMMARY
Parkev Tatevosian, CFA, examines Affirm Holdings' recent financial performance and the broader context of the buy now, pay later industry. The analysis covers consumer credit trends, company growth metrics, and a valuation assessment leading to a buy recommendation for risk-tolerant investors.
MAIN POINTS
- Affirm reported a 35% year-over-year increase in gross merchandise volume to $11.6 billion and discussed consumer demand and repayment ability.
- The persistent demand for credit is highlighted, alongside the importance of prudent lending and managing delinquencies.
- Delinquencies have risen but remain within expectations, with context provided on improved consumer finances during the pandemic due to government stimulus.
- Post-pandemic normalization is leading to stretched consumer budgets and expectations of rising delinquencies, but Affirm benefits from facilitating merchant sales.
- Affirm's partnerships with major merchants like Sleep Number and growth in active merchants and consumers are noted as positive trends.
- The stock is assessed as undervalued with a buy rating, though it is characterized as above-average risk suited for investors with higher risk tolerance.
DETAILED ANALYSIS
Affirm Holdings has demonstrated significant growth in the buy now, pay later sector, reporting a 35% increase in gross merchandise volume to $11.6 billion in its latest quarter. The company’s management indicates that consumer demand for credit remains steady, with no notable deterioration in borrowers’ ability to repay. Delinquency rates have risen, but this increase aligns with expectations and is partly attributed to seasonal factors such as a stronger tax refund period that temporarily reduced the denominator in delinquency calculations.
Historically, consumer balance sheets improved during the pandemic years due to widespread government stimulus, enabling many individuals to reduce debt and refinance at lower rates. This period saw record lows in delinquencies and defaults. However, as stimulus effects wane and economic pressures such as tariffs and higher oil prices constrain household budgets, a normalization of delinquency rates is anticipated.
Despite these headwinds, Affirm is positioned to benefit from its role in facilitating transactions for merchants, which can drive sales that might not otherwise occur. Notably, Affirm recently secured a partnership with Sleep Number, offering 0% APR financing for up to 12 months, illustrating the appeal of its services to large retailers. The company’s active merchant base grew by 44% to 515,000, while active consumers increased by 22% to 22.6 million.
From a valuation perspective, Affirm trades at a forward price-to-earnings ratio of 16.3 and a forward price-to-operating cash flow of 12. A discounted cash flow analysis suggests the stock is undervalued, with a market price of $63 compared to an intrinsic value estimate of $96. The recommendation is a buy for Affirm, but with the caveat that it is an above-average risk investment, suitable for those willing to accept higher volatility for the potential of greater returns.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with a viewer discount.
- Webull investing platform sign-up with bonus shares.
- Subscribe to Parkev Tatevosian's free monthly Substack newsletter.