Affirm's Funding Is On Solid Ground But Has Its Risks, Analyst Says

Wedbush analyst David J. Chiaverini maintained an Underperform rating on Affirm Holdings Inc AFRM with a  price target of $15.

Chiaverini hosted an advisor call yesterday with a former capital markets executive from Affirm. 

The analyst came away from the call with a better understanding of Affirm's funding structure, including significant progress made over the last several years and a discussion of potential risks during volatile capital market backdrops. 

Per his speaker, the most significant risk to Affirm's funding base is the technical structure of their ABS deals and balancing an appropriate trigger threshold. 

While AFRM's ABS deals have been performing well and no triggers have been breached, his speaker laid out a hypothetical scenario in which if a trigger is breached and a residual gets locked out from cash flows, residual buyers may lose appetite for future deals, which could prevent the company from being able to complete off-balance sheet ABS deals and instead need to retain the residual interests on balance sheet and tie up capital. 

If a trigger is breached, it could take a long time to rebuild credibility with these buyers. 

Furthermore, according to his speaker, if Affirm overextends on leverage in the ABS deals and credit quality unexpectedly weakens, it could directly interfere with the company's ability to sell the residual interests in future ABS deals.

The analyst projects Q2 revenue and EPS of $514.9 million and $(0.86), respectively.

Price Action: AFRM shares traded higher by 3.2% at $25.83 on the last check Wednesday.

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