Affirm Holdings
stock was dropping Thursday after Piper Sandler downgraded the Buy Now Pay Later platform as competition intensifies and interest rates hit margins.
Analyst Kevin Barker downgraded
Affirm
stock (ticker: AFRM) to Underweight from Neutral but maintained his $11 price target. Barker adjusted his fiscal 2023 estimates to a loss of 36 cents a share on revenue of $1.55 billion, from a loss of 33 cents a share on revenue of $1.56 billion. He also adjusted his fiscal 2025 estimates to earnings of 4 cents a share on revenue of $1.89 billion, from earnings of 9 cents a share on revenue of $1.92 billion.
Barker’s target price remains significantly lower than the current market price. Affirm stock was falling 15% Thursday to $13.18, and was on pace for its largest percentage decrease since Feb. 9. Despite the drop, shares sport a gain this year of 35%.
“AFRM relies on loan sales to drive a sizable portion of revenue,” Barker wrote in a research note, “but the company has increasingly held loans on balance sheet as higher rates and wider credit spreads pressured pricing in the whole loan market.”
In its fiscal third quarter, reported in early May, $33 million of Affirm’s total revenue of $381 million came from gains on sales of loans. That missed Wall Street estimates at the time, and fell from the $52 million in the year-ago period although total revenue beat estimates.
“Considering rates have remained stubbornly high, AFRM should feel incremental pressure from lower gain on sale revenue and higher funding costs for loans held on balance sheet,” Barker added.
Affirm declined a request for comment. However, the company pointed Barron’s to commentary from its third-quarter shareholder letter.
“While we expect higher funding costs to remain a headwind, we have built a resilient funding model,” the company said in the letter. “… Driven by our solid credit performance, we expect to continue delivering good returns to funding partners and maintain ample capacity to fund future GMV growth over the long term.”
The company also said in its letter to shareholders that higher interest rates and credit spreads are expected to continue to be a headwind to revenue less transaction costs (RLTC) as a percentage of gross merchandise volume (GMV).
Competition is another risk to Affirm that led Barker to recommend selling the stock. Buy Now Pay Later became increasingly popular during the pandemic as people sought to stretch their dollars while avoiding taking on new credit-card debt. Since then, companies like
PayPal
(PYPL) and
Apple
(AAPL) have announced their own BNPL options, competing directly with Affirm.
Affirm said in its letter to shareholders that “serving a wider consumer audience than competitors while driving strong and predictable credit outcomes continues to be a key competitive advantage for Affirm.”
However, Barker wrote that competitors are focused on “driving network volume via short-duration products that tend to skew towards smaller order size and, therefore, pushing AFRM to lean into longer-duration products,”
“We believe this push into longer-duration products will lead to greater credit/rate sensitivity, which will lead to a lower multiple on the stock over the long term,” the analyst said.
Write to Angela Palumbo at [email protected]
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