Affirm: Stunning Acceleration In Growth And Margin Expansion (NASDAQ:AFRM)
Affirm (NASDAQ:AFRM) has proven to be remarkably resilient in the face of higher interest rates. It was merely a year ago that the company witnessed its unit-level margins dip below its target range, which led Wall Street to react with significant pessimism. However, following adjustments to their credit management policies, Affirm has managed to realign its unit-level margins within the desired range, while also maintaining impressive growth in Gross Merchandise Volume (GMV). The introduction of the Affirm card has notably contributed to this GMV growth, suggesting that concerns over competition may be exaggerated. Despite being viewed by some as a meme stock, the current valuation seems quite attractive if the company can achieve its medium-term goals. With this in mind, I am upgrading my recommendation on the stock to buy, though I caution potential investors about its inherent volatility.
In revisiting my analysis from January, I’ve lamented selling my AFRM shares last October. Despite my reservations, the stock has lagged behind the broader market index by approximately 30%. However, this underperformance now presents a compelling opportunity to invest due to consistent execution at the management level.
AFRM distinguishes itself as the foremost Buy Now, Pay Later (‘BNPL’) entity in the public market. Despite skepticism surrounding the BNPL sector with rising interest rates, AFRM has demonstrated operational efficiency reminiscent of its pandemic-era performance. In its recent quarterly report, AFRM reported a 32% year-over-year growth in GMV to $7.5 billion, significantly outperforming both Shopify and Amazon’s GMV growth rates, thereby suggesting that Affirm is outpacing the overall e-commerce growth.
The spike in GMV was substantially bolstered by the Affirm Card, alongside robust revenue growth of 48% year-over-year to $591 million. Despite the challenges posed by higher interest rates, Affirm has seen a decrease in transaction costs as a percentage of GMV, which contributed to an impressive growth in Revenue Less Transaction Costs (RLTC), essentially marking a notable improvement in gross margins for the business.
While AFRM continues to operate at a loss on a GAAP basis, it is making strides towards reducing its GAAP losses and bolstering non-GAAP margins. The company’s strong balance sheet, with $2 billion in cash and investments against $1.4 billion in convertible notes, underpins its financial stability. Looking forward, management has set optimistic targets for GMV growth, revenue growth, RLTC growth, and adjusted operating margin for the upcoming quarter.
Management’s confidence in their credit underwriting efficiency and the broader macroeconomic conditions suggest a positive outlook for Affirm. Despite its solid performance, competition and potential volatility remain as key risks. However, given its accelerated GMV growth, improving revenue growth, and rapidly enhancing profit margins, AFRM’s valuation appears to be in the growth at a reasonable price (GARP) territory. Consequently, I am upgrading the stock to buy, anticipating that it could deliver returns commensurate with its top-line growth, potentially reaching around $40 per share in the next 12 months.
In conclusion, Affirm has managed to navigate through a challenging higher interest rate environment, demonstrating accelerating growth, normalizing revenue growth, and significantly improving profit margins. With a strong balance sheet and appealing valuations, AFRM presents a compelling buy opportunity for investors willing to navigate its potential volatility.
