Affirm's Stock: Why Morgan Stanley Recommends, Goldman Sachs Is Waiting It Out

Fintech company Affirm Holdings Inc AFRM, which started trading in early January is a top-three player in the buy now, pay later space that offers consumers an alternative method to finance goods.

The Affirm Holdings Analysts: Morgan Stanley analyst James Faucette initiated coverage of Affirm's stock with an Overweight rating and a $142 price target.

Goldman Sachs analyst Matthew O'Neill initiated coverage of Affirm's stock with a Neutral rating and a $95 price target.

Morgan Stanley — Addressing Underserved Market: Affirm hasn't "invented" a new way of shopping online as point of sale financing has existed in some form for thousands of years, Faucette wrote in the note. Instead, the company has seen success in addressing the underserved market of Gen Y and Gen Z that have lower credit card adoption.

Meanwhile, Affirm's market share of transaction financing stood at just 1.6% of all U.S. e-commerce sales in 2019. Affirm's ability to attract and retain young consumers today would represent a "substantial" long-term secular growth story. In fact, the company can capture a 12% share of financing all global e-commerce transactions by 2025.

Investors are "willing to subsidize" the company's growth profile over the years as it is only modeled to reach breakeven by the fourth quarter of 2023. From there, the company should expand margins to 10% over the next decade and ultimately hit a long-term target of 30%.

Related Link: Cramer On Affirm IPO: Investors Are Buying Into Fintech, Period

Goldman Sachs Sees "Intense Competition": Affirm's strategy of improving its loss rates is showing signs of success, O'Neill wrote in the note, adding that a partnership with Shopify Inc SHOP to act as its exclusive financing provider for merchants will result in more favorable low value and short duration transactions.

However, the partnership has yet to formally start while a similar partnership with Peloton Interactive Inc PTON offers minimal to no exposure to Peloton's subscription revenue and is not available to consumers outside of North America.

While the company should maintain a leadership position in the buy now, pay later financing category, the stock's more than 100% rally since its $49 initial public offering implies investors should stick to the sidelines amid "intense" competition, the analyst wrote.

The stock's current price implies a multiple of 66 times revenue fewer transaction expenses and the company can't justify the valuation, especially since the Shopify partnership hasn't started yet.

AFRM Price Action: Shares of Affirm Holdings traded higher by 18% Monday at $122.76.

(Photo: Affirm Holdings)