Affirm Holdings Inc. (AFRM) Stock Gets Upgraded: B of A Sees Profitability on the Horizon
Affirm Holdings Inc. (AFRM) stock received a boost after B of A Securities analyst Jason Kupferberg upgraded the stock from Neutral to Buy, setting a price target of $36. This optimistic outlook is fueled by the analyst’s belief that the company’s profitability may be closer than market expectations.
Key Takeaways:
- Profitability is Closer Than Expected: Kupferberg believes that GAAP profitability for Affirm might arrive sooner than consensus forecasts, with a potential arrival in fiscal 2026. This optimism stems from the company’s expense prudence and the analyst’s projection that warrant expense and stock-based compensation (SBC) expenses will decrease.
- Lower Interest Rates Work In Affirm’s Favor: The forecasted decline in interest rates across 2024 and 2025 could benefit Affirm by reducing its funding costs and boosting its gain on loan sales.
- Strong Partnerships and Continued Growth: Affirm’s recent expansion of its partnership with Apple Inc. (AAPL), coupled with the increasing adoption of the Affirm Card and potential geographical expansion of collaborations with Amazon.Com Inc. (AMZN) and Shopify Inc. (SHOP), is expected to drive revenue growth in the coming years.
A Closer Look at the Analyst’s Rationale
Kupferberg anticipates that Affirm’s fourth-quarter earnings report and guidance could act as a positive catalyst for the stock. He believes that Affirm may convey a more bullish message on profitability while exceeding fourth-quarter revenue expectations and delivering a solid fiscal 2025 outlook.
The analyst highlighted Affirm’s medium-term profitability framework, which he deems achievable given the company’s efficient expense management so far this year. He also noted that market expectations for interest rate cuts in the coming years are increasingly favorable for Affirm, as lower rates will benefit the company’s funding costs and enhance its profitability.
Despite the recent challenging market performance for Affirm’s stock, Kupferberg sees a strong potential for future growth. He projects sales of $2.27 billion in fiscal 2024, $2.75 billion in fiscal 2025, and $3.24 billion in fiscal 2026, further bolstering his bullish outlook.
Affirm’s Recent Strategy
Affirm recently increased the annual percentage rate (APR) cap on its loans to 36%, up from 30%. This move might further enhance the company’s yields and Gross Merchandise Value (GMV) growth, according to Kupferberg. These positive developments, coupled with recent strategic partnerships and ongoing expansion, are contributing to the analyst’s optimistic view of Affirm’s trajectory.
Affirm’s Stock Performance and Future Outlook
Following the upgrade, AFRM shares closed up 2.31% at $27.46 on Tuesday. While the market has been skeptical of Affirm’s recent performance, the B of A analyst’s upgrade suggests that the company’s future might be brighter than currently perceived. With a projected path toward profitability and a favorable interest rate environment, Affirm is poised to potentially capitalize on the growth opportunities in the buy now, pay later (BNPL) sector.
Potential Challenges and Risks
While the outlook for Affirm is positive, it’s important to consider the potential challenges and risks:
- Regulatory Uncertainty: The Consumer Financial Protection Bureau (CFPB) has recently introduced new rules for BNPL companies, which could impose additional compliance costs and operational complexity on Affirm.
- Competition: The BNPL market is highly competitive, with established players like PayPal Holdings Inc. (PYPL) and Klarna, as well as newcomers constantly entering the scene.
- Economic Outlook: A potential economic downturn could negatively impact consumer spending and consequently, the demand for BNPL services.
Conclusion
Despite potential challenges, the recent upgrade by B of A signifies a shift in sentiment toward Affirm. With its strategic partnerships, increasing focus on profitability, and a potentially favorable economic environment, Affirm is in a position to capture more market share and become a dominant player in the rapidly growing BNPL industry.
