Shares of Affirm Holdings (AFRM 0.27%) recently lost over a fifth of their value overnight after delivering mixed results for its fiscal second quarter ended Dec. 31, 2021. The company's latest earnings call contained lots of great news, but the stock market focused on a wider-than-expected loss on the bottom line.
Are Wall Street analysts right to be extra nervous about Affirm right now, or is this a great stock to buy on the dip? Let's start by looking at some of the good news.
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The good news
Buy now, pay later (BNPL) isn't the end of the world for credit cards, but it is becoming a lot more popular than you might expect. During Affirm's latest earnings call, management said the number of active consumers at the end of 2021 grew 150% year over year to more than 11 million.
Merchants eager to sell big-ticket items are beating a path to Affirm's doors even faster than Gen Zers who eschew traditional credit cards. During the calendar year 2021, the number of merchants that allow checkout with Affirm grew more than 20-fold. During the last Black Friday to Cyber Monday period, Affirm processed a stunning 1.6% of all e-commerce sales in America.
Why Affirm stock tanked anyway
Businesses that use big data to build a superior product should scale, but we're not seeing that with Affirm. Instead, operating expenses have been outpacing revenue since the company's stock market debut in 2020.
AFRM Revenue (TTM) data by YCharts
During the last six months of 2021, Affirm lost a staggering $469 million. That isn't a good look when you're in the consumer credit business.
Last November, Affirm strengthened its balance sheet by issuing $1.7 billion worth of five-year convertible notes with a 0% interest rate. This will cushion the blow from upcoming interest rate hikes promised by the Federal Reserve, but those convertible notes are also a ticking time bomb if Affirm keeps bleeding money. The company could end up borrowing at exorbitant rates to roll those notes over before they convert into heaps of new shares.
A buy now?
In the last half of 2021, Affirm managed to keep delinquencies of 30 days or more below the previous year period. This suggests heavy investment in a bright future could be driving the losses, instead of poorly underwritten loans. Last November, the company rolled out its initial offering on Amazon in the U.S. and launched a new debit card product that could really take off.
In partnership with Visa, Affirm could enter just about every brick-and-mortar store you can think of with its Debit+ card. The card links directly to customers' existing bank accounts and allows them to split up payments on most purchases between $100 and $1000. It's still in a limited release testing stage, but so far it looks like Debit+ customers use Affirm to make purchases far more often than they use Affirm to shop online.
Affirm's pace of growth over the past year has been tremendous, but the accelerating losses are impossible to look past. This is a great fintech to keep an eye on, but it's probably best to wait for a trend toward profitability instead of taking a humongous risk on this stock right now.