Growth stocks have been sent to the slaughterhouse recently in the wake of a more hawkish outlook from the Federal Reserve, record levels of inflation, and global economic threats stemming from the war between Russia and Ukraine. The Cboe Volatility Index, commonly referred to as Wall Street's fear gauge, has soared almost 25% in the past month, indicating the current downward trajectory of investor sentiment. During times of economic uncertainty, investors tend to gravitate toward safer assets as opposed to companies that are unprofitable and cash-flow negative.
As a result, many high-growth stocks have plunged from previous highs at a red-hot pace -- but that means investors are presented with a unique buying opportunity to acquire some of the world's most innovative companies at extremely low price levels. One of those companies, Affirm Holdings (AFRM 5.31%), has watched its share price collapse more than 85% over a six-month span. The company participates in the rapidly expanding "buy now, pay later" (BNPL) market, and continues to grow its top line at record speed.
Now trading at just 14% of its 52-week high, is it time to add Affirm to your long-term portfolio?
Image source: Getty Images.
An exceptional growth story
Affirm is a leading provider of BNPL services, which allow consumers to pay for items in equal installments over a specific period of time. In its second quarter the company's revenue rose by 77% year-over year to $361.0 million. The number of transactions and active customers expanded 218% and 150%, up to 12.2 million and 11.2 million, respectively. Analysts are modeling sales to eclipse $1.3 billion in 2022, equal to 53% growth from a year ago.
The global BNPL market is forecasted to expand at a compound annual growth rate (CAGR) of 26% through 2030, amounting to nearly $40 billion. If Affirm can capture 10% of the industry by then, it would generate annual sales of $4 billion, indicating a 360% increase from 2021 and an average annualized growth rate of 16%. The company's runway for growth is apparent, but there is one major caveat: It is far away from achieving profitability.
The company recorded a per share loss of $2.72 in 2021, and analysts expect the company to report a loss again in 2022. In fact, it's probable that Affirm won't record a positive bottom-line for quite some time. And given that competition in the industry is fierce, there's a possibility that it never achieves profitability. Fintech powerhouses like PayPal (PYPL 2.90%) and Block (SQ 2.32%) may continue exerting pressure on the company's future margins and prevent it from realizing profitability in the long run.
More room to fall
The ongoing sell-off has undoubtedly made Affirm's share price more attractive, but that doesn't mean the stock is cheap. The company is trading at 5.4 times forward sales, notably higher than peers PayPal and Block, which currently carry price-to-sales multiples of 3.3 and 3.1, respectively.
AFRM PS Ratio (Forward) data by YCharts
This makes me think that the stock has not yet reached bargain levels, and may have more room to fall in the coming quarters. It wouldn't be unwise to stay on the sidelines until its price-to-sales multiple draws closer to those of its peers. At that time, the company may possess a favorable risk-reward ratio and warrant further consideration.
Should you buy Affirm?
Affirm is a high risk, high reward investment. On one hand, the company's growth story has been remarkable. On the other hand, it lacks an honest competitive moat, and is still years away from achieving profitability. By virtue of the current tech sell-off, there are more actionable opportunities available on the stock market today. Stay clear of Affirm until it improves its profitability profile and shows that it can sustain success over the long run.
