Affirm‘s (AFRM 28.82%) stock jumped 9% during after-hours trading on Aug. 24 after the buy now, pay later (BNPL) company posted its latest earnings report. For the fourth quarter of fiscal 2023 (which ended on June 30), its revenue rose 22% year over year to $446 million and beat analysts’ forecasts by $40 million. Its net loss widened from $186 million to $206 million, or $0.69 per share, but still topped analysts’ estimates by $0.14.
Affirm is growing, but it’s still struggling to prove its business model is sustainable. Even after its post-earnings pop, it remains nearly 70% below its IPO price from January 2021. So should investors bet on this BNPL leader’s long-term recovery?
Why did the bulls turn against Affirm?
Affirm’s BNPL platform targets younger and lower-income people who can’t get approved for traditional credit cards. For businesses, it promotes itself as a cheaper alternative to credit cards, which charge swipe fees for each transaction.
Instead of directly processing a payment, Affirm approves microloans for customers to break up larger purchases into smaller installments. Its shorter installment plans don’t accumulate any interest, while its extended ones are provided at higher rates. It doesn’t charge any late or hidden fees. That simple approach locked in a lot of people and businesses in the pandemic, and its growth was amplified by the temporary spike in online sales and stimulus-induced spending.
That’s why Affirm’s revenue soared 71% to $871 million in fiscal 2021 (which ended in June 2021) and grew 55% in fiscal 2022. But in fiscal 2023, its revenue only rose 18% to $1.59 billion. That slowdown was caused by three major challenges.
First, inflation broadly curbed consumer spending. Second, Peloton (PTON 5.71%) — Affirm’s top customer at the time of its IPO — suffered a grueling post-pandemic slowdown. Lastly, more diversified tech giants — including PayPal (PYPL 0.79%), Block (SQ 0.41%), and even Apple (AAPL 1.26%) — expanded into the BNPL market.
As Affirm’s growth cooled off and it faced fiercer competition, its net losses nearly quadrupled from $113 million in fiscal 2020 to $441 million in fiscal 2021, then widened again to $707 million in fiscal 2022 and $985 million in fiscal 2023. All that red ink suggested Affirm didn’t have much pricing power — and that it was likely locking in high-profile merchants like Amazon and Walmart with lopsided loss-leading deals.
That mix of slowing growth and widening losses convinced the bulls that Affirm no longer deserved a premium valuation. When Affirm’s stock hit its all-time high of $168.52 on Nov. 4, 2021, its enterprise value reached $47.6 billion — or 37 times the revenue it would actually generate in fiscal 2022.
At $15, Affirm has an enterprise value of $7.1 billion — or four times its projected revenues for fiscal 2024. But even at that lower valuation, its own insiders aren’t warming up to its stock. Over the past 12 months, its insiders sold more than three times as many shares as they bought.
But some glimmers of hope are appearing
It’s easy to see why the market turned against Affirm, but a few green shoots are appearing. It expects its gross merchandise volume (GMV), or the value of all goods sold on its platform, to grow 19% to $24 billion in fiscal 2024. It expects to squeeze out roughly the same percentage of its GMV (7.9%) as revenue — which implies its total revenue will also grow about 19% to $1.9 billion. That would mark a slight acceleration from fiscal 2023.
Affirm also ended fiscal 2023 with only 2.3% of its accounts (excluding Peloton and its “Pay in 4” platform) with delinquent loans of over 30 days. That percentage suggests it won’t be overwhelmed by delinquent payments anytime soon, but it expects that ratio to increase slightly in the first half of fiscal 2024.
Affirm also continues to expand. In Q4, its number of active consumers grew 18% year over year to 16.5 million, while its number of active merchants rose 8% to 254,000. Its transactions per active consumer also rose 30%.
More importantly, Affirm’s adjusted operating margin turned positive in Q4. It expects to achieve a positive adjusted operating margin of at least 2% for fiscal 2024, compared to a negative adjusted operating margin of 4.6% in fiscal 2023. It’s still a long way from achieving profitability on a generally accepted accounting principles (GAAP) basis, but it attributes its improving non-GAAP numbers to its recent cost-cutting measures (including layoffs for nearly a fifth of its workforce), its pursuit of “higher gross margin” merchants, and the rollout of its own debit cards.
With $2.1 billion in cash, cash equivalents, and marketable securities, Affirm won’t go bankrupt anytime soon — even if it continues to struggle to narrow its GAAP losses.
Is it the right time to buy Affirm?
Affirm’s stock looks less bubbly than it did two years ago, but it still doesn’t seem like a bargain. It’s still growing, but it’s deeply unprofitable and could struggle to keep pace with PayPal, Block, and Apple as they aggressively expand their BNPL ecosystems with loss-leading tactics. In other words, I think it’s smarter to stick with any of those better-diversified tech companies instead of betting on Affirm’s long-term recovery.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon.com and Apple. The Motley Fool has positions in and recommends Block. The Motley Fool recommends Amazon.com, Apple, PayPal, Peloton Interactive, and Walmart. The Motley Fool has a disclosure policy.