Affirmation: There’s More Room for Growth in BNPL’s Favorable Situation (NASDAQ:AFRM)

Affirm Holdings Co., Ltd. (Nasdaq:AFRM) recently posted 2024 3rd quarter earnings, demonstrating impressive growth in GMV and revenue and more disciplined cost management. Despite this, Affirm’s stock price has fallen nearly 10% since the company announced its earnings results. report. In my opinion, this decline could be due to Shopify (shop) soft guidance Consider that Affirm is integrated with Shopify’s in-store POS. That said, Affirm’s share price drop could be an opportunity thanks to the company’s potential growth from expected increases in BNPL spending, potential interest rate cuts, and expansion into international markets, namely the UK. That’s what I think. Based on this, I rate Affirm a Buy, with a price target of $105 by 2030, suggesting an upside of 225% from current levels.

Third quarter overview

Affirm reported in Q3 2024 Total transaction amount $6.3 billion, up 35.7% from the previous year However, due to seasonality, sales were down 16% sequentially, exceeding guidance of $5.8 billion to $6.0 billion. As a result, Affirm’s revenue increased 51% year over year from $381 million to $576.1 million, but decreased 3% quarter over quarter from $591 million due to the seasonality of Affirm’s business. did.

During the quarter, Affirm’s active consumers increased to 18.1 million, an increase of 13.1% year-over-year and 2.8% sequentially. This was driven by increased adoption of his Affirm card, which surpassed 1 million cardholders shortly after the end of the quarter. At the same time, the number of transactions per active consumer increased to 4.6 from 3.6 in the same period last year and 4.4 in the previous quarter. Total transactions for the third quarter were 21.5 million, of which 93.5% were repeat customers, an increase of 49.3% year-over-year and 17.9% sequentially.

Looking at Affirm’s fixed costs, the company has more disciplined cost management compared to last year. For the nine months ended March 31, Affirm’s technology and data analytics costs decreased from $463.5 million to $377.6 million year over year, accounting for 23% of Affirm’s revenue. (41% in the same period last year).

The same was true for sales and marketing expenses, which decreased from $493.1 million, representing 43% of revenue, to $441.0 million, representing 27% of revenue, during the same period. Additionally, general and administrative expenses for the same period decreased to $401.8 million (24% of revenue) from $458.8 million (40% of revenue) in the same period last year.

These cost savings are a step in the right direction, showing that Affirm is on track to meet its medium-term adjusted operating cost projections.The company shared its goals in its latest report Investor day presentationOur goal is to have sales and marketing as a percentage of revenue in the low single digits, and technology and general and administrative expenses as a percentage of revenue in the mid-single digits.

Delinquency rates were flat year-over-year, but the 30-day and 90-day cohorts showed slight improvement quarter-over-quarter.

For the fourth quarter of fiscal 2024, Affirm expects GMV to be between $6.75 billion and $6.95 billion, which represents a full-year GMV of between $26.1 billion and $26.3 billion. is between $585 million and $605 million, suggesting full-year sales will be between $2.25 billion and $2.27 billion. 2.26 billion dollars. At the midpoint of the company’s guidance, full-year revenue is on track to grow 42% year-over-year, consistent with management’s forecast for revenue growth of over 20% over the medium term, which was shared in an investor presentation. ing.

BNPL market growth

In my opinion, the main driver of Affirm’s future growth will be the increased adoption of BNPL payment methods.Covered in a previous article pagaya (P.G.Y.), by the end of 2023. 82.1 million U.S. consumers rely on BNPL for their spending and financing needs, and that number is projected to reach 112.7 million by 2027. During this period, BNPL’s revenue is expected to increase from $71.9 billion to $124.8 billion by 2027 at a CAGR of 14.8%.

Affirm currently covers about 10% of U.S. e-commerce merchants, so the expected growth in BNPL spending bodes well for the company’s growth potential. At the same time, it covers about 60% of the total addressable e-commerce sales. As such, the expected growth in his BNPL spending in the US will be reflected in his GMV of Affirm in the future, and thus his earnings.

Another tailwind to Affirm’s growth potential is the possibility of interest rate cuts this year. Currently, Affirm offers payments at interest rates ranging from 0% to 36% for him payable in 4 purchases, based on the consumer’s credit score. This means that a consumer with a low credit score is likely to receive an interest rate closer to his 36% cap.

Affirm is not a bank and relies on funding partners to provide BNPL loans to consumers at the point of sale.these partner Cross River Bank, Celtic Bank, and Reed Bank. That said, banks’ risk appetite generally increases when interest rates are low, as lending standards are relaxed. This could put Affirm in a position to extend loans to more consumers who would otherwise be denied BNPL loans under current lending standards. At the same time, Affirm can offer lower interest rates to consumers with lower credit scores, which could increase transactions and, in turn, revenue.

With that in mind, a follow-on rate cut in April could be on the horizon. CPI print This showed inflation pressures were easing after CPI readings beat expectations for the third straight month. Core CPI, which excludes food and energy prices, rose 3.6% year-on-year in April. This was in line with expectations and slowed from the 3.8% rise in March. Monthly core price growth was 0.3%, in line with expectations, but down from 0.4% over the past three months.

Strong CPI results in April have investors excited two The rate will be cut by 25 basis points (bp) in September and December this year, bringing the interest rate to a range of 4.75-5% from the current range of 5.25-5.5%. In addition to increasing loan amounts, lower interest rates also benefit Affirm by reducing financing costs.

Affirm’s funding costs increase in Q3 2024 77% The year-over-year increase was due to higher benchmark interest rates on the loans Affirm receives to fund BNPL loans and higher coupon payments on securitized loans. Therefore, the low interest rate environment could be a major tailwind for Affirm’s earnings outlook.

International expansion

Another tailwind for Affirm’s future growth is its planned global expansion. The company’s main markets are the United States and Canada, but there is a large untapped global market as 60% of the world’s e-commerce, excluding China, is outside North America. The next market Affirm is looking to enter is the UK. The total addressable market in the UK is worth $133 billion, and Affirm’s existing top three partners already boast 20% penetration in the UK market. This means that if Affirm starts operations in the UK, it could potentially access a $26.6 billion market without considering the possibility of securing further partnerships with UK merchants.

Affirm also has opportunities in Europe’s top markets, as its top three existing partners have penetration rates of 25% in Spain, 23% in France, 24% in the Netherlands, 34% in Italy, and 38% in Germany. Masu.

In my opinion, Affirm’s expansion into these markets in addition to the UK will help GMV grow beyond its mid-term target of $50 billion. Therefore, I am confident that Affirm can continue to grow its sales by more than 20% for the foreseeable future.

evaluation

Given Affirm’s growth potential driven by expected growth in the BNPL market, potential interest rate cuts, and global expansion, I think it could be a bargain at its current valuation . I am using his P/S ratio to value his Affirm because it remains unprofitable on a GAAP or non-GAAP basis and has not yet posted positive adjusted operating income on a full-year basis. Masu. Therefore, I believe the best metric to value Affirm at this stage is its P/S ratio, given that my bullish thesis for the company’s stock is its potential for earnings growth over the next few years. .

Affirm is targeting 42% revenue growth at the midpoint of this year’s earnings forecast, and expects 25% revenue growth in fiscal 2025 and 2026. However, we expect sales growth to start decelerating from FY2027 to FY2030. Because Affirm could mature in new markets. Based on this, my forecast for Affirm’s earnings up to fiscal 2030 is as follows.

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My prediction is that Affirm will trade at the following P/S ratio.

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Meanwhile, my forecast, as shared in the latest investor presentation, suggests that dilution will be less than 3% per year.

Given that Affirm shares its outlook for 316 million shares outstanding by the end of 2024, and assuming 3% dilution thereafter, Affirm’s outstanding shares through 2030. is expected to be as follows.

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Although Affirm is the only pure BNPL public stock, I believe its valuation is comparable to another fintech startup, Upstart (upst) and marketa (MQ), both are fintechs in the growth stage. That being said, Upstart and Marqeta have forward P/S multiples of 4.66 and 5.64, respectively. In other words, the average P/S multiple for both companies is 5.15. Using this multiple, Affirm’s target stock price by 2030 is as follows.

risk

Risks to my bullish thesis include a potential Klarna IPO in Q1 2025. report From Sky News. Klarna has secured support from shareholders and regulators to set up a UK-registered holding company in preparation for an IPO in New York, the report said. Affirm is currently the only pure BNPL investment on the market, so Klarna’s potential IPO could provide investors with an opportunity to diversify their exposure to the BNPL market, which could lead to Affirm may be reflected negatively in the evaluation.

Another risk to consider is competition. The BNPL industry is highly competitive and has low barriers to entry, allowing many startups to enter the market. At the same time, US Bancorp (USB), Citigroup (C), JPMorgan Chase (J.P.M.), not to mention card issuers like American Express (AXP). These institutions have an advantage over BNPL providers because they have a wider range of credit card networks and can serve merchants at lower rates compared to his BNPL providers like Affirm.

conclusion

The company’s stock is down 10% since announcing strong results in Q3 2024, and I think the current decline is an attractive entry point into Affirm. BNPL providers continue to record impressive GMV and revenue growth despite the current high interest rate environment and are exercising more disciplined cost management.

With that in mind, we expect Affirm to continue posting solid revenue growth for the foreseeable future, driven by increased adoption of BNPL payment methods and interest rate cuts that could begin as early as this year. Masu. Meanwhile, Affirm’s international expansion in the UK and potential expansion into Europe could drive further GMV growth as existing partners already have high penetration in these markets. be. Based on this, I rate Affirm a Buy and set a price target of $105 by 2030, representing a 225% upside from current levels.