Affirm: Chasing Too Much Growth

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Affirm: Chasing Too Much Growth

seekingalpha2022-03-15

SummaryAffirm continues to report strong growth with large losses.The BNPL product remains too costly to warrant an investment even with the stock trading at the all-time lows.The stock isn't ...

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Huatttah
·2022-03-15
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Denovo
·2022-03-15
Interesting
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AnaiAnai
·2022-03-15
growth untul stock price left 10% of the peak price. All look like scam.
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Johnnydoe
·2022-03-15
nice
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The Buy Now, Pay Later fintech now trades at all-time lows after the stock hardly traded below $50 for all of 2021. My investment thesis sees Affirm as more of a Neutral play here considering the market is at extreme fear levels.Source: FinVizChasing Growth, Not ProfitsOver the last few months, investors have started to understand that BNPL loans aren't actually a new concept and the lending product isn't necessarily profitable. The Affirm deal with Amazon(AMZN) was an interesting turning point when investors finally awoke to a potential negative sign that the e-commerce giant went with a partnership over internal development.The main reason Affirm fell sharply on Monday was a major investor backing out of an asset-backed security sale. The move is a signal that investors aren't as interested in investing in BNPL loans, but the investor could just be risk adverse due to macro situations.Affirm guided FQ3'22 results to the high end of prior guidance, but the company is still predicting a massive loss. The BNPL provider continues to fuel GMV growth, but the bottom line results have to improve for investors to return to the stock.Source: Affirm FQ3'22 updateThe forecast for FY22 GMV is now $14.78 billion, up from $13.25 billion in GMV when my last article reinforced the bearish thesis. Amazingly, my original negative call on the stock following the hot IPO occurred when Affirm traded over $125 and forecast GMV of $7.3 billion for FY21. The fintech is now forecasting nearly 100% GMV gains this FY, but the adjusted operating loss forecast has gone from $125 million in FY21 to ~$157 million in FY22 now.A company can invest in the future and attract investors, but a company can't keep investors when the business appears to have no reasonable path to profits. In addition, this path doesn't factor in any risks of larger credit losses in a future recession.For FQ2'22, Affirm reported credit losses of $52.6 million. These amounts combined with other funding costs and processing expenses leave the BNPL product with a substantial cost level cutting revenues in about half to arrive at net revenues.Source: Affirm FQ2'22 earnings releaseReckless SpendingThe stock is far less appealing when one realizes the net revenues (revenues less transaction costs) were only $183.5 million in the quarter. Affirm looks far away from profits when realizing the company has $379.8 million in operating expenses. Even factoring in $88.5 million in stock-based compensation and the fintech still has an incredible operating cash expense level of nearly $300 million.In essence, Affirm only generates $1 in net revenue for each $2 in gross revenues. At this rate, the company has to add nearly $240 million in additional quarterly revenues to cover the ongoing losses from massive operating expenses.An investor has to question the benefits of the BNPL option, if Affirm has to spend $143.5 million in expenses on sales and marketing. One has to question whether the fintech is obtaining these major partnerships with Shopify(NYSE:SHOP)and Amazon due to reckless spending.The technology spending of $95.0 million is palpable considering the technology in the data to fund the BNPL loans in a fast and risk reduced manner. Though, this level of spending doesn't leave much profit potential. Remember, these amounts include stock-based compensation not included in adjusted operating losses, but investors are being hit by both operating losses and the higher share counts in the process.The issue with the funding concerns is that Affirm isn't even on a path to profits. When a company is this far away from even breakeven, any hiccup in the business model can be disastrous to investors.The company claims the capacity to fund $20 billion in GMV, but this level of GMV isn't enough revenues to push the current business model to profits. The above math just concluded Affirm needs 65%+ revenue growth for any chance at break-even levels, yet the statement on GMV capacity would only equate to 33% growth from the FY22 target. In addition, Affirm seems unlikely to grow revenues by over 65% without further growing operating expenses.The stock probably has less downside now with a market cap of $7.5 billion and the FY23 consensus revenue targets of $1.9 billion. With the ongoing large losses and credit risk, Affirm just isn't appealing on normal compressed P/S multiples.TakeawayThe key investor takeaway is that an investor now gets to watch from the sidelines on whether Affirm can resolve the expense escalation issues knowing the stock isn't likely to rally until these issues are resolved. The Amazon deal has to eventually contribute more than additional costs in order for Affirm to be an investable stock. An investor has to continue questioning whether the fintech bought growth and Amazon was willing to go the partnership route versus internal development wasn't due to the inevitable funding issues and costs of the BNPL product.The recommendation is that investors should sit on the sidelines and see if Affirm can make a material improvement in the cost structure while maintaining growth before the stock is investable.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9032831742,"gmtCreate":1647322880830,"gmtModify":1676534216600,"author":{"id":"3582020329880330","authorId":"3582020329880330","name":"Huatttah","avatar":"https://community-static.tradeup.com/news/789254fa2844c01ae8426d599163e26e","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":1,"crmLevelSwitch":0,"authorIdStr":"3582020329880330","idStr":"3582020329880330"},"htmlText":"Like&nbsp;","listText":"Like&nbsp;","text":"Like","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9032831742","repostId":1153914667,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9032830295,"gmtCreate":1647321831326,"gmtModify":1676534216453,"author":{"id":"3555142417454196","authorId":"3555142417454196","name":"Denovo","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"authorIdStr":"3555142417454196","idStr":"3555142417454196"},"htmlText":"Interesting","listText":"Interesting","text":"Interesting","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9032830295","repostId":1153914667,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9032174901,"gmtCreate":1647316822755,"gmtModify":1676534215925,"author":{"id":"3583884958321017","authorId":"3583884958321017","name":"AnaiAnai","avatar":"https://static.tigerbbs.com/8b0d0d8e20a4082ac0bc6a98756546ec","vip":1,"crmLevel":1,"crmLevelSwitch":1,"authorIdStr":"3583884958321017","idStr":"3583884958321017"},"htmlText":"growth untul stock price left 10% of the peak price. All look like scam.","listText":"growth untul stock price left 10% of the peak price. All look like scam.","text":"growth untul stock price left 10% of the peak price. All look like scam.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9032174901","repostId":1153914667,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9032178749,"gmtCreate":1647315579039,"gmtModify":1676534215851,"author":{"id":"3550279565766787","authorId":"3550279565766787","name":"Johnnydoe","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":4,"crmLevelSwitch":0,"authorIdStr":"3550279565766787","idStr":"3550279565766787"},"htmlText":"nice","listText":"nice","text":"nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9032178749","repostId":1153914667,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":73,"commentSize":4,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}