Is Affirm Stock a Buy?

Affirm (AFRM -1.06%) attracted a stampede of bulls when it went public on Jan. 13, 2021. The buy now, pay later (BNPL) services provider priced its IPO at $49, and its shares soared to an all-time high of $168.52 on Nov. 4, 2021.

At the time, investors were dazzled by Affirm's explosive growth rates and its disruptive potential. By breaking up larger purchases into smaller installments through microloans, Affirm's BNPL platform was an appealing option for lower-income customers who couldn't get approved for traditional credit cards. For merchants, Affirm's microloans were attractive alternatives to accepting credit cards that charged high swipe fees.

Image source: Getty Images.

Affirm also went public during the peak of the growth and meme stock rally in 2021. As a result, many investors glossed over its persistent losses and soaring valuation. When it hit its peak, its enterprise value reached nearly $48 billion, which was 37 times the revenue it would actually generate in fiscal 2022 (ended June 30, 2022).

But shortly afterwards, Affirm's stock plunged as its growth cooled off and rising interest rates popped its bubbly valuation. Today, its stock trades at about $34 per share with an enterprise value of $15 billion, which is less than 7 times the revenue it's expected to generate in fiscal 2024. So should investors buy it as a turnaround play today?

Is Affirm's business stabilizing?

Affirm's revenue surged 71% in fiscal 2021 and jumped 55% in fiscal 2022. But in fiscal 2023, its sales only rose 18%. That abrupt deceleration was caused by three major headwinds: inflation, which broadly curbed consumer spending; declining transactions from major customer Peloton Interactive in the post-pandemic market; and fierce competition from other BNPL services like PayPal's (PYPL 0.52%) Pay in 4, Block's (SQ -0.12%) Afterpay and Apple (AAPL 1.37%) Pay Later.

But over the past year, Affirm's year-over-year growth in revenue and gross merchandise volume (GMV) accelerated as its adjusted operating margin significantly expanded.

Data source: Affirm. YOY = year over year.

The company attributed that acceleration to its new merchant deals, the increased adoption of its Affirm Card (which combines a debit card with BNPL options), and an improved macro environment for travel bookings and general merchandise purchases. As its top-line growth sped up, economies of scale diluted its unit costs. Affirm also streamlined its spending and replaced some of its customer service representatives with AI chatbots.

In the third quarter, its active customers rose 13% year over year to 18.1 million as its number of merchants jumped 19% to 292,300. That steady expansion suggests that competing BNPL platforms aren't meaningfully throttling its growth.

Moreover, only 2.3% of Affirm's loans were delinquent by over 30 days as of the end of March, representing a sequential decline from its delinquency rate of 2.4% at the end of 2023. That shrinking rate counters the bearish notion that Affirm's business will collapse under the weight of its "subprime" microloans during an economic downturn.

What's next for Affirm?

For the fourth quarter, Affirm expects revenue to increase 31%-36% year over year, GMV to grow 23%-26%, and adjusted operating margin to rise to 15%-17%. That would represent a slight top-line deceleration from Q3, but that's mainly because it faces tough comparisons to a few bigger deals last year.

For the full year, analysts expect Affirm's revenue to rise 43%. For fiscal 2025, they forecast its revenue to climb 19%, even though the company expects its revenue growth rate to stay above 20% for the foreseeable future.

That outlook is promising, but Affirm still isn't anywhere close to breaking even by generally accepted accounting principles (GAAP) or non-GAAP metrics yet. It's also carrying all of its loans on its own balance sheet, and its high debt-to-equity ratio of 2.5 could make it an unappealing investment as long as interest rates stay elevated.

Analysts expect it to narrow its GAAP net loss from $985 million in fiscal 2023 to $609 million in fiscal 2024, followed by a narrower net loss of $589 million in fiscal 2025. It had $2.1 billion in liquidity at the end of its latest quarter, but the bears will argue that its business isn't sustainable yet -- especially when PayPal, Block, Apple, and others can afford to operate their BNPL tools as loss-leading extensions of their larger ecosystems.

Is it the right time to buy Affirm's stock?

Affirm's business is gradually stabilizing, and its stock looks a lot cheaper than it did during the peak of the growth stock rally. However, I think investors should wait to see if it maintains its target revenue growth rate of at least 20% and meaningfully narrows its net losses over the next few quarters before betting on its long-term turnaround.