Affirm's (AFRM 5.31%) stock price fell 90% in 2022 as its buy now, pay later (BNPL) business model was squeezed by inflation and rising interest rates. Inflation forced consumers to rein in their discretionary spending, while rising rates popped Affirm's bubbly valuations and drove investors toward more conservative investments. By the end of 2022, Affirm's future seemed bleak because its growth was decelerating, it was deeply unprofitable, and a growing number of competitors were carving up the BNPL market.
Despite all those challenges, Affirm's stock has nearly doubled in value since the beginning of 2023. Let's see why Affirm's stock bounced back -- and if it's too late to chase that rally.
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Why did Affirm's stock collapse?
Affirm's platform approves microloans for consumers, which enables them to carve up their larger purchases into smaller payment plans. Its shorter installment plans don't accumulate any interest, while its longer ones are provided at higher rates. Unlike traditional credit cards, Affirm doesn't charge any late or hidden fees.
The company generally targets lower-income shoppers who can't get approved for traditional credit cards. For merchants, it bills its BNPL platform as a cheaper alternative to credit cards, which charge swipe fees to process each payment.
Affirm initially dazzled investors after its public debut in January 2021. Its revenue surged 71% to $871 million in fiscal 2021 (which ended in June 2021), and rose another 55% to $1.35 billion in fiscal 2022. Those explosive growth rates prompted many bullish investors to overlook its net losses -- which widened from $113 million in fiscal 2020 to $441 million in fiscal 2021 and then widened again to a staggering $707 million in fiscal 2022.
The buying frenzy in growth and meme stocks in 2021 also caused many investors to ignore Affirm's unsustainable valuations. When its stock hit a record high of $168.52 on Nov. 4, 2021, its enterprise value reached $47.6 billion -- a whopping 37 times the revenue it would generate in fiscal 2022.
That nosebleed valuation, along with all its red ink, made it an easy target for the bears as its growth cooled off and interest rates started climbing. Its heavy exposure to the connected bike and treadmill maker Peloton, which suffered a painful slowdown in 2022, exacerbated its sell-off.
For fiscal 2023, Affirm expects its revenue to rise just 13% to 15% as it continues to face tough macro headwinds. But with an enterprise value of $7.6 billion, it trades at just 5 times that forecast -- even after its massive rally since the beginning of the year. It also still trades more than 60% below its IPO price. So based on the valuations alone, it's not too late to buy Affirm's stock if you believe its growth will accelerate again once the economy improves.
Why did Affirm's stock rally this year?
Affirm's rally this year was driven by four catalysts. First, it laid off nearly a fifth of its workforce to cut costs. Nonetheless, it still expects its adjusted operating margin to slide from negative 5.8% in fiscal 2022 to negative 5.9% to negative 7% in fiscal 2023. Second, its third-quarter earnings report on May 9 exceeded analysts' expectations on both the top and bottom lines. Third, it expanded its partnership with Amazon by integrating its BNPL services with Amazon Pay.
Lastly, the bears got too greedy. Even after its massive year-to-date rally, 15% of Affirm's outstanding shares were still being shorted as of May 14. Therefore, it could easily experience another squeeze as a new bull market starts.
However, investors should also realize the competitive headwinds won't wane anytime soon. PayPal launched its own BNPL service in 2020, Block acquired Affirm's rival Afterpay in early 2022, and Apple rolled out a BNPL option for Apple Pay for its U.S. users this March.
It could be incredibly difficult for Affirm, which ended its latest quarter with only 16 million active consumers, to compete against those larger competitors without racking up even steeper losses with loss-leading strategies.
So is it too late to buy Affirm's stock?
Based on the fundamentals, it doesn't seem like it's too late to buy Affirm's stock. Precedence Research also expects the BNPL market to grow at a compound annual growth rate (CAGR) of 29% from 2023 to 2032, so there might be plenty of room for Affirm, PayPal, Afterpay, Apple, and other BNPL players to expand without trampling each other.
Unfortunately, I'm simply not convinced that Affirm's business model is sustainable yet. It might thrive as a loss-leading division of a larger company, but I'm not confident in its ability to survive as a stand-alone company. So unless Affirm stabilizes its revenue growth while meaningfully narrowing its operating losses, I wouldn't touch its volatile stock.
