Is Affirm Holdings Stock a Buy Now?

Affirm's (AFRM -1.34%) stock price plunged 21% on Feb. 10 after the "buy now, pay later" (BNPL) services provider posted its second-quarter earnings. The report had been partly leaked earlier in the day, which prompted Affirm to release its entire earnings report ahead of schedule.

Affirm's revenue rose 77% year over year to $361 million, beating estimates by $28 million. However, its net loss widened from $27 million to $160 million, or $0.57 per share, which missed expectations by $0.20.

That steep loss was disappointing, but did investors overreact and create a new buying opportunity for more patient investors? 

Image source: Getty Images.

How fast is Affirm growing?

Affirm's number of active consumers increased 150% year over year to 11 million in the second quarter. Its transactions-per-active-customer average grew 15% to 2.5, and its gross merchandise volume (GMV) rose 115% to $4.5 billion. All of those growth rates accelerated from the previous quarter:

Data source: Affirm. YOY = Year over year.

In addition, Affirm's total number of active merchants skyrocketed year over year from 8,000 to 168,000, thanks to the integration of its BNPL services into Shopify's (SHOP -2.37%) Shop Pay platform. That expansion -- along with its new partnerships with Amazon, Walmart, Target, and other retailers -- is reducing Affirm's dependence on Peloton Interactive (PTON -0.98%), the struggling connected exercise bike maker that was previously its top merchant.

Peloton was still Affirm's second-largest merchant partner during the second quarter, but none of Affirm's top merchants -- including Peloton -- accounted for more than 10% of its total GMV. By comparison, Affirm generated 20% of its revenue from Peloton in fiscal 2021.

This dilution of its merchant concentration could make Affirm a more balanced and diversified play on the growing BNPL market.

Solid guidance for the rest of the year

Affirm expects its GMV to rise 76%-78% for the full year, and for its revenue to increase 48%-50%. Both estimates surpassed Wall Street's expectations, and would only represent a slight slowdown from its 80% GMV growth and 71% revenue growth in fiscal 2021.

Those estimates were also notably much higher than the guidance it provided in its first-quarter report last November, which called for 58%-61% GMV growth and 41%-44% revenue growth for the full year.

Based on the midpoint of Affirm's expectations and a stock price in the high $50s, the company is valued at about 13 times this year's sales. That's a very reasonable price-to-sales ratio considering that plenty of other tech stocks are still generating slower growth but trading at higher valuations.

But don't ignore the red ink

Affirm's top-line growth looks healthy, but its bottom line is a mess. Over the past year, its operating margins have deteriorated as its losses have widened:

Data source: Affirm.

Those steep losses raise troubling questions about Affirm's ability to disrupt traditional credit card companies with lower fees for merchants and customers. Those lower fees might temporarily lure big retailers away from credit card companies, but that advantage could quickly disappear if it attempts to charge higher fees to narrow its losses.

Here's another red flag: A recent Credit Karma survey found that 34% of BNPL users had fallen behind on at least one payment. That's probably why Affirm boosted its provision for credit losses to 15% of its revenue in the second quarter, compared to just 6% of its revenue a year ago.

In addition, larger fintech companies like PayPal Holdings (PYPL -1.14%) and Block (SQ -1.68%) have also been adding BNPL services into their digital payment platforms. That loss-leading competition could further erode Affirm's pricing power in the crowded BNPL market.

Even on a non-GAAP (generally accepted accounting principles) basis, which excludes its stock-based compensation expenses and subsidies for new merchant partners, Affirm's operating margin still came in at negative 2.2% for the second quarter, compared to positive 1.5% a year ago.

Those widening losses are dangerous, because Affirm's total liabilities nearly doubled year over year to $4.48 billion during the quarter, partly due to a $1.5 billion convertible note offering last November. As a result, its debt-to-equity ratio jumped from 0.9 to 1.8.

That rising leverage makes Affirm a risky stock to hold as interest rates climb and boost the borrowing costs for unprofitable companies.

Is Affirm's stock worth buying?

Affirm is growing rapidly, but its losses look unsustainable, and its lofty goal of disrupting traditional credit card companies seems half-baked. Investors should avoid this stock for now -- even after its year-to-date stock price decline of more than 40% -- and stick with the better-run fintech players instead.