Financial technology company Affirm Holdings, Inc. (AFRM) in San Francisco builds next-generation digital and mobile-first commerce platforms in the United States and Canada. With Target Corporation’s (TGT) recent announcement that the retailer will allow its customers to make purchases via AFRM’s buy-now-pay-later (BNPL) technology, AFRM’s shares have climbed 19.8% in price over the past five days and 61.3% over the past month.

However, the fast-growing buy-now-pay-later industry has been facing challenges related to payment default and intense competition. As people worldwide have become increasingly attracted by the BNPL services amid the pandemic, several companies have entered this space.

Although AFRMs’ rapidly expanding network could help it grow its customer base, its lofty valuation is not in sync with its growing operational losses.

Here’s what could influence AFRM’s performance in the near term:

Emerging Problems in the Buy-Now Pay-Later Space

While a COVID-19 pandemic-driven surge in BNPL services--as more consumers use these tools to finance everything from home decor to electronics and travel--bodes well for BNPL platform operators like AFRM, an increasing number of users falling behind on payment could negatively impact their business. According to a recent study conducted by Qualtrics on behalf of Credit Karma, 34% of those who have used BNPL services have fallen behind on one or more payments.

In addition, the explosive growth in the BNPL space has led to more dealmaking and competition. With companies like PayPal Holdings, Inc. (PYPL), Mastercard Inc. (MA), and AfterPay Ltd. (AFTPY) acquiring new firms to boost their customer bases in the industry, the growing competition could diminish  AFRM’s market share.

Unstable Financials

For the fourth quarter, ended June 30, 2021, AFRM’s non-GAAP operating margin came in at 5.4%, versus 30.5% in the prior-year period. Its total operating expenses rose 234% year-over-year to $386.47 million. AFRM incurred a $128.23 million net loss and a $0.48 loss per share over this period. In addition, the company reported a $114.37 million net decrease in cash, cash equivalents, and restricted cash. Also, its operating loss stood at $124.69 million for the quarter, compared to $39.32 million in operating income in the fourth quarter of 2020.

AFRM’s 0.3% trailing-12-month asset turnover ratio is 57.5% lower than the 0,7% industry average. Furthermore, its net income margin, EBITDA margin, ROA, and ROE came in at negative 49.5%, 32%, 8.9%, and 38.9%, respectively. And the company’s trailing-12-month cash from operations stood at a negative $193.13 million.

Stretched Valuation

In terms of forward EV/Sales, AFRM is currently trading at 32.43x, which is 708.9% higher than the 4.01x industry average. And its 32 forward Price/Sales multiple is 714.5% higher than the 3.93 industry average. Also, the company’s 14.73x trailing-12-month Price/Book ratio is 214.5% higher than the 4.69x industry average.

POWR Ratings Reflect Bleak Prospects

AFRM has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. AFRM has a D grade for Quality and Stability. The stock’s negative profit margin and higher volatility are reflected in these grades.

Also, it has an F grade for Value. This is consistent with the company’s higher-than-industry Price/Sales ratio.

Beyond the grades I’ve highlighted above, we have also rated AFRM for Growth, Momentum, and Sentiment. Get all AFRM ratings here.

AFRM is ranked #64 of 69 stocks in the D-rated Technology – Services industry.

Bottom Line

Although AFRM’s shares have gained significantly over the past month owing to its strategic partnership and rapidly growing network, the stock appears to be highly volatile given the risks in the BNPL space as established players launch new BNPL services. On top of that, the stock’s premium valuation could cause its shares to tumble in the coming months. As such, we think the stock is best avoided now.

How Does Affirm Holdings, Inc. (AFRM) Stack Up Against its Peers?

While AFRM has an overall POWR Rating of D, one might want to consider taking a look at its industry peers, Fujitsu Limited (FJTSY) and NetScout Systems, Inc. (NTCT), having an A (Strong Buy) rating.

AFRM shares fell $0.26 (-0.19%) in premarket trading Tuesday. Year-to-date, AFRM has gained 38.68%, versus a 17.57% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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