Affirm (AFRM 5.31%) posted its latest earnings report on Nov. 8. For the first quarter of fiscal 2024, which ended on Sept. 30, the buy now, pay later (BNPL) services provider grew its revenue 37% year over year to $497 million and exceeded analysts' expectations by $53 million. It narrowed its net loss from $251 million to $172 million, or $0.57 per share, and cleared the consensus forecast by $0.13.
Affirm's stock price surged nearly 20% the following week in response to that big earnings beat, but it remains nearly 50% below its initial public offering (IPO) price. Is it too late to hop aboard the bullish bandwagon, or is Affirm finally headed back toward its IPO price?
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How does Affirm make money?
Affirm's BNPL platform lets consumers break up larger purchases into smaller installment plans through microloans. Its shorter payment plans don't accumulate any interest, and it doesn't charge any late or hidden fees. That simple approach made it an attractive option for lower-income consumers who couldn't get approved for traditional credit cards. For merchants, it was an appealing alternative to credit cards, which had high swipe fees for each payment.
Affirm locked in a lot of consumers and businesses throughout the pandemic, and its growth was amplified by a surge in online sales, stimulus-induced spending, and a growing awareness of BNPL platforms across social media platforms. As a result, its revenue surged 71% in fiscal 2021 (which ended in June 2021) and grew 55% in fiscal 2022. That explosive growth, along with the buying frenzy in meme stocks, propelled its stock to its all-time high of $168.52 on Nov. 4, 2021.
Why did the bulls initially give up on Affirm?
At its peak, Affirm's enterprise value reached $47.6 billion -- or 37 times the revenue it would actually generate in fiscal 2022. To sustain that nosebleed valuation, Affirm needed to maintain its breakneck growth rates.
But in fiscal 2023, Affirm's revenue only rose 18%. That slowdown was caused by three headwinds: inflation, which broadly curbed consumer spending; its declining revenue from Peloton Interactive, a major customer who suffered a grueling slowdown after the height of the pandemic; and stiff competition from other BNPL platforms, including PayPal's Pay in 4, Block's Afterpay, and Apple Pay Later.
As Affirm's growth cooled off, its net losses widened. Its delinquency rates also gradually rose as the macro environment worsened, and its high debt-to-equity ratio made it an unappealing stock to hold as interest rates continued to rise. Investors looked at all those issues and decided that Affirm no longer deserved its premium valuation.
Why are some of the bulls coming back?
It's easy to see why Affirm's stock plummeted below its IPO price, but its revised outlook for fiscal 2024 suggests it's finally reached an inflection point. It now expects its gross merchandise volume (GMV), or the value of all goods sold through its platform, to rise more than 20% to $24.25 billion for the full year. That's higher than its prior outlook for at least 19% growth.
For fiscal 2024, Affirm expects its revenue as a percentage of its GMV to remain "similar" to fiscal 2023, while analysts expect its total revenue to rise 27%. That would represent a significant acceleration from fiscal 2023 and end its cyclical downturn.
Affirm expects its adjusted operating margin to improve from negative 5% in fiscal 2023 to at least positive 5% in fiscal 2024. That's also higher than its prior outlook for generating a positive adjusted operating margin of at least 2%. It attributes that expansion to cost-cutting measures, its pursuit of higher-margin merchants, and the introduction of its own debit cards.
Affirm also continues to expand its reach in this challenging environment. In the first quarter, its active consumers grew 15% year over year to 16.9 million, its transactions per active consumer increased 25%, and its number of active merchants rose 9% to 266,000. Its delinquency rates (over 30 days and excluding its Pay in 4 service) remain just above 2% -- which counters the notion that it's a house of cards built on subprime microloans.
Affirm's $2.1 billion in liquidity should give it plenty of time to stabilize its business and narrow its losses. As for its valuation, it currently has an enterprise value of $11.4 billion -- which is just 6 times its projected sales for fiscal 2024.
It's not too late to buy Affirm
Affirm has disappointed a lot of investors since its public debut, but I believe brighter days could be right around the corner. Its GMV growth is accelerating again, its operating margin is turning positive, it's still gaining new customers and merchants, and its stock is finally reasonably valued relative to its growth prospects. All those strengths indicate it's not too late to invest in Affirm -- even though it's already notched some big gains after its latest earnings report.
