Several brokerage firms lowered their targets for Affirm’s stock price in May.
Courtesy Affirm
Shares of Affirm Holdings, the “buy now, pay later” company, have tumbled this year, but Bank of America now says it is too cheap to pass up.
BofA Securities’Jason Kupferberg upgraded the stock to Buy from Neutral on Tuesday, with a price target of $71, implying a gain of 15% relative to Friday’s closing level. The shares were trading around $61.70 on Tuesday morning, for a gain of 1.5%.
Barron’s was bullish on the stock in April, when it traded at around $70.
Affirm Holdings (ticker: AFRM) has fallen 34% this year as the company faces several headwinds. The company offers zero-percent, short-term financing on purchases, including options to pay off an acquisition via a custom installment plan.
While the buy now, pay later, or BNPL, business model is looking solid, one of Affirm’s largest merchant partners has had troubles. Peloton Interactive (PTON), a major revenue source for Affirm, recently recalled its treadmills over safety concerns, following the death of a child and dozens of other reported incidents. That has pressured Affirm’s revenue.
Affirm is also a high-growth, high-multiple stock, the type that investors have shunned as interest rates have risen. The stock is heavily shorted. And bears have argued the valuation isn’t remotely justified, especially with a lockup period for early investors expiring, representing about 50% of the fully diluted share count.
Several brokerages downgraded their price targets after the company reported first-quarter results in May. Credit Suisse cut it from $85 to $70 on May 11, maintaining a Neutral rating. RBC Capital Markets took it down from $155 to $87, maintaining a Buy.
Kupferberg sees value in the stock, however, for a few reasons. For one, he argues that consensus estimates for gross market volume and revenues are too low for 2021 and 2022, partly because of Affirm’s strong relationship with the e-commerce company Shopify (SHOP) and its strength with merchants other than Peloton.
He notes that Affirm is generating more revenue from interest income, comprised of consumer loans and gains on its loan portfolio. He also likes Affirm’s diversifying revenue streams and payments platform, including savings accounts and a branded debit card that the company plans to launch later this year.
The high short interest, at 29% of the float, could work in Affirm’s favor. If the business improves more than anticipated, the price could rise, forcing a so-called short squeeze. Investors who borrowed stock and sold it, hoping to purchase shares to return to the lender at a lower price in the future, would be forced to buy to close out their positions.
Granted, Affirm is facing stiffer competition in the BNPL business from PayPal Holdings (PYPL) and other rivals. Affirm’s margins could come under pressure as the rates it charges merchants for BNPL services erode, particularly given that PayPal doesn’t charge merchants extra for BNPL, on top of its standard fees.
At $71, Affirm would trade at 15 times estimated 2022 revenues of $1.35 billion. That would still be a slight premium to other payment and BNPL companies, including Afterpay (AFTPY), PayPal, and Square (SQ). Kupferberg says that is s warranted, however, due to Affirm’s improving results and faster top-line growth than most of its peers.
Write to Daren Fonda at [email protected]
