Stock of the week - Affirm Holdings (30.11.2023)

• Affirm Holdings jumped over 30% during past 5 sessions
• Fiscal-Q1 results showed improvement in margins
• Reports on strong US holiday season sales are pushing stock higher
• Increase in Buy-Now-Pay-Late (BNPL) popularity likely to benefit stock
• Multiple valuation
• Stock breaks above the upper limit of bullish channel

Affirm Holdings (AFRM.US) has been the best performing stock among US large caps over the past week. Stock gained over 30% over the past 5 sessions and was the best performing company in the Russell 1000, index of 1000 largest US public companies, over the period. Reports on solid US holiday season sales are driving share price of the BNPL-focused company higher. Let's take a quick look at recent news on Affirm Holdings.

Fiscal-Q1 2024 earnings

Affirm Holdings released its fiscal-Q1 2024 earnings report at the beginning of November. Company reported 37% YoY jump in fiscal-Q1 revenue, to $496.5 million (exp. $445.7 million), as well as a net loss of $171.8 million - smaller than the net loss of $251.3 million reported a year ago. In spite of higher revenues, operating loss narrowed, showing that the company has been efficient in limiting costs and is benefitting from economies of scale. While company remains unprofitable, it has managed to improve its margins in recent quarters. Growth in Gross Merchandise Volume remained strong and the company also issued an upbeat forecasts for the current quarter as well as full fiscal-2024.

Fiscal-Q1 2024 earnings

• Revenue: $496.5 million vs $445.6 million expected (+37% YoY)
• Gross Merchandise Volume (GMV): $5.62 billion vs $5.43 billion expected (+27.3% YoY)
• Total Network Transactions: 18.8 million vs 17.9 million expected (+41.4% YoY)
• Gross Margin: 42.77% vs 42.11% expected
• Operating Income: -$209.4 million vs -$231.3 million expected
• Net Income: -$171.8 million vs -$216.2 million
• Dilute EPS: -$0.57 vs -$0.61 expected (-$0.86 a year ago)

Fiscal-Q2 2024 forecast

• Revenue: $495-520 million vs $505.9 million expected
• Gross Merchandise Volume (GMV): $6.70-6.90 billion vs $6.80 billion expected

Fiscal-2024 forecast

• Gross Merchandise Volume (GMV): 'above $24.25 billion' up from 'above $24 billion

Affirm Holdings continues to be unprofitable but improved in margins shows that company is efficient in limiting costs and is benefiting from economies of scale. Source: Bloomberg Finance LP, XT

Deal with Amazon

A solid fiscal-Q1 2024 earnings report was not the only upbeat news on Affirm Holdings released at the beginning of November. Around a week prior to earnings release, it was reported that Affirm expanded its partnership with Amazon and now Affirm's 'buy-now-pay-later', or BNPL, will be available checkout option for millions of small business owners.

BNPL allows customers to purchase goods and services and delay payment until later date, often split into a few payments. Such a method of payment became very popular after Covid pandemic of 2020 as high inflation and rising costs of living caused consumers to be more reluctant to make full upfront payments for big-ticket items. A more transparent interest than in the case of credit cards is also a factor contributing to broader adoption.

Strong BNPL sales drive Affirm shares higher

A BNPL option from Affirm at the Amazon marketplace was launched ahead of the Black Friday weekend. This seems to be a perfect play as not only Black Friday sales hit a record high, but also saw a big year-over-year jump in use of BNPL payments. According to data from Adobe Analytics, online sales during Thanksgiving climbed 5.5% YoY, to $5.6 billion, while Black Friday sales were 7.5% YoY up at $9.8 billion. BNPL sales during Black Friday are said to have reached $760 million, an increase of 20% YoY. Adobe also expects Cyber Monday sales to have reached $12.4 billion this year, with almost $800 million of those being made with use of BNPL feature. That would mark an almost 19% YoY jump in BNPL payments.

Strong Buy-Now-Pay-Later sales during holiday period, with BNPL sales growth significantly outpacing total sales growth, show that the method is increasingly popular and it sets Affirm's business on a good track to perform well during the upcoming Christmas holiday shopping season. Having said that, one should not be surprised by a rally in Affirm Holdings stock this week.

Affirm Holdings has recently seen its sales growth re-accelerate after period of growth slowdown. Source: Bloomberg Finance LP, XTB

How Affirm compares with peers?

Valuing Affirm Holdings' stock can be a difficult challenge. As the company continues to generate losses and is yet to turn profits, fundamental models such as Discounted Cash Flow method would need to rely on a number of assumptions. Those would not be able to be set based on historical averages and trends, and therefore would entail a high degree of uncertainty. Also, as Affirm Holdings does not pay dividends, it cannot be valued using Gordon Growth Model. However, we can take a look how the company compared to peers with a multiple analysis.

An important point to note is that as Affirm Holdings is an unprofitable company and is still experiencing a cash burn (negative free cash flow), some of the often used multiples, like P/E or EV/EBITDA, cannot be calculated. We have constructed a large peer group consisting of US companies, whose main line of business is financial transactions processing. A table shows multiples for Affirm Holding's peers as well as Affirm's valuation based on mean, median and cap-weighted multiples. As one can see, valuation calculated with means and cap-weighted multiples suggest that Affirm stock is undervalued while valuation made with median multiple, suggest the stock to be overvalued.

Source: Bloomberg Finance LP, XTB

A look at the chart

Taking a look at Affirm Holdings chart (AFRM.US) at D1 interval, we can see that the company has been trading in a strong upward move recently. Stock has been trading in an upward channel since early-May 2023, but a boost received from the upbeat media reports on Black Friday and Cyber Monday spending allowed it to break above the upper limit. Gains accelerated later on the stock tested the $34.90 handle yesterday, which marks the textbook range of the upside breakout from the channel. A failure to break above this area yesterday suggests that bulls may be running out of steam. On the other hand, recent gains were very quick and steep and even as the stock failed to break above the $34.90 mark, it still ended yesterday trading 4% higher! Having said that, another attempt at breaking above this level cannot be ruled out and should we see such a break, the attention will shift to the $40.00 resistance zone.

Source: xStation5