Affirm: If you buy now, you'll pay for it later
Affirm had one of the hottest IPOs of the year. Its stock was priced at $49 in January and quickly climbed to nearly $140; that's over $40B in market cap. Since then - more precisely since reporting its first earnings report as a public company- the stock has lost over 50% of its peak value. This is despite the earnings beat. So what changed?
Back story: Affirm did forecast a wider than expected loss for 2021 which cast a dim spot over its earnings but that's not the primary reason the stock has been in a downward spiral. That's happening due to fears over increased competition and valuation going too far. Many analysts came out with what amounts to bearish ratings. Honestly, this is completely understandable considering the massive and out-of-this-world valuation for Affirm which is, after all, still a small fintech company. Also, SoFi - which has similar if not better growth prospects than Affirm - had recently signed a definitive agreement to go public via a SPAC that values it at ~$20B. Investors are better off pulling funds out of Affirm, and investing in the SPAC that will take SoFi public.
Additionally, while it's true that Affirm has a large market opportunity, the sector is crowded with Afterpay, Klarna and other smaller players. Both of these buy now, pay later (BNPL) services have more than 10 million U.S. users compared to only 4.5 million active users for Affirm.
Now that Affirm's market cap is back at ~$20B and is inline with SoFi's, will I be adding it to my portfolio? That's a no. It is up nearly 60% from its IPO, which was only two months ago. And it is operating in a highly competitive market and is only on a path to generate ~$1B in revenues by the end 2022 revenues - Klarna is already there. So, I can't see how Affirm's revenues will soar at a fast enough rate to match the current valuation. I'll look to buy the stock after it comes back to around $50.
Bottom line: I want to emphasize that BNPL is a fast growing market and it is likely to remain a viable payment option for many years to come. I also believe that Affirm will be one of the many long-term winners of the BNPL market and think long-term investors will be rewarded over time. However, its current valuation is still a bit excessive. You're better off waiting. Increased competition potentially entering the public market will put downward pressure on Affirm's stock over the coming months and quarters. I will look to buy it after a larger correction.
Back story: Affirm did forecast a wider than expected loss for 2021 which cast a dim spot over its earnings but that's not the primary reason the stock has been in a downward spiral. That's happening due to fears over increased competition and valuation going too far. Many analysts came out with what amounts to bearish ratings. Honestly, this is completely understandable considering the massive and out-of-this-world valuation for Affirm which is, after all, still a small fintech company. Also, SoFi - which has similar if not better growth prospects than Affirm - had recently signed a definitive agreement to go public via a SPAC that values it at ~$20B. Investors are better off pulling funds out of Affirm, and investing in the SPAC that will take SoFi public.
Additionally, while it's true that Affirm has a large market opportunity, the sector is crowded with Afterpay, Klarna and other smaller players. Both of these buy now, pay later (BNPL) services have more than 10 million U.S. users compared to only 4.5 million active users for Affirm.
Now that Affirm's market cap is back at ~$20B and is inline with SoFi's, will I be adding it to my portfolio? That's a no. It is up nearly 60% from its IPO, which was only two months ago. And it is operating in a highly competitive market and is only on a path to generate ~$1B in revenues by the end 2022 revenues - Klarna is already there. So, I can't see how Affirm's revenues will soar at a fast enough rate to match the current valuation. I'll look to buy the stock after it comes back to around $50.
Bottom line: I want to emphasize that BNPL is a fast growing market and it is likely to remain a viable payment option for many years to come. I also believe that Affirm will be one of the many long-term winners of the BNPL market and think long-term investors will be rewarded over time. However, its current valuation is still a bit excessive. You're better off waiting. Increased competition potentially entering the public market will put downward pressure on Affirm's stock over the coming months and quarters. I will look to buy it after a larger correction.
Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.
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