Why Is Affirm Holdings Stock Falling Today?

Affirm Holdings, Inc AFRM stock is trading lower after Piper Sandler analyst Kevin J. Barker downgraded the stock from Neutral to Underweight with a price target of $11.00.

Barker expects persistently higher rates to pressure operating margins as AFRM needs to hold more loans on the balance sheet. 

In addition, he expects tighter underwriting standards, increased pricing, and the re-introduction of student debt payments to cause an incremental slowdown in revenue growth over the next year. 

Considering these headwinds, the analyst believes it will be difficult for AFRM to generate the 24% revenue growth implied by consensus estimates. 

Barker notes that revenue growth decelerated to 11% and 7% in the past two quarters as AFRM held more loans on its balance sheet. 

AFRM relies on loan sales to drive a sizable portion of revenue, but the company has increasingly held loans on its balance sheet as higher rates and wider credit spreads pressured pricing in the whole loan market. Considering rates have remained stubbornly high, AFRM should feel incremental pressure from the lower gain on sale revenue and higher funding costs for loans on the balance sheet. 

Given the significant slowdown in the past two quarters, he believes the bar is relatively high for AFRM to achieve 24% Y/Y revenue growth in FY24. 

In addition, Barker expects funding costs to increase to 7.0% of originations in 4Q23 from 6.2% in 3Q23 and remain elevated with the forward curve moving higher. 

The analyst notes that the 3-month Treasury increased by 60 bps, and 2Y Treasury increased by 81 bps in 2Q23. 

AFRM has generated significant growth (70% in FY21-22) and has taken market share over the past few years as more consumers utilized BNPL payment methods. 

However, continuing this growth has become increasingly tricky as competitors with existing networks offering BNPL products are priced as value-added services rather than drivers of profits. 

In particular, these competitors focused on driving network volume via short-duration products that tend to skew towards smaller order sizes, pushing AFRM to lean into longer-duration products. 

He believes this push into longer-duration products will lead to greater credit/rate sensitivity, leading to a lower stock multiple over the long term.

Price Action: AFRM shares traded lower by 5.71% at $14.94 premarket on the last check Thursday.