Affirm Holdings (NASDAQ:AFRM) stock slid 10% in Thursday morning trading after Piper Sandler downgraded the Buy Now, Pay Later company to Underweight from Neutral on expectations that high interest rates and competition will pressure its operating margins.
The company "has increasingly held loans on balance sheet as higher rates and wider credit spreads pressured pricing in the whole loan market," analyst Kevin Barker pointed out in a note to clients.
So, with persistently high rates, "AFRM should feel incremental pressure from lower gain on sale revenue and higher funding costs for loans held on balance sheet."
And, over the next year, Barker contended that the firm will see an incremental slowdown in sales growth, driven by tighter underwriting standards, increased pricing, and the re-introduction of student debt payments.
The 24% Y/Y revenue growth in 2024 implied in consensus estimates seems difficult for Affirm (AFRM) to achieve given the headwinds like higher funding costs, as well as the "significant slowdown we have seen the past two quarters," the note said.
On the competition front, Barker said rivals with existing BNPL networks, including PayPal (PYPL), Apple (AAPL) and Block (SQ), are focusing on driving network volume through short-duration products that are less expensive to fund than longer-dated ones. That, in turn, is pushing Affirm (AFRM) to lean into longer-duration products, in a move that "will lead to greater credit/rate sensitivity, which will lead to a lower multiple on the stock over the long term."
Barker's Underweight rate diverges from the SA Quant system rating and the average sell-side analyst rating, both at Hold.
