The fintech (financial technology) industry is transforming the U.S. financial sector, with the pace of digital payments accelerating since the onset of the COVID-19 pandemic. It is no surprise that fintech stocks have been among the top outperformers of 2020.

The e-commerce boom and digitization of major service industries have triggered rapid adoption of remote financial transactions. Buy now, pay later (BNPL) firms are the latest additions to the fintech industry, and the recent IPO of Affirm Holdings, Inc. (AFRM) stands out in this category.

AFRM is a payments platform that provides easy payment solutions for shoppers. Its buy-now-pay-later options make big purchases affordable. Customers can choose AFRM as a payment option on a partner site and then choose from a range of installment payment alternatives. The company now has partnerships with 6,500 stores, including Walmart (WMT) and Target (TGT). But its biggest sales partner is Peloton Interactive (PTON), which accounts for roughly 30% of its total sales. It recently inked a deal with Shopify (SHOP) to power its Shop Pay Installments and act as its exclusive financing provider for merchants.

Let’s take a closer look at the factors that could influence AFRM’s performance in the near term:

Solid Stock Market Debut

AFRM offered 24.6 million shares in its IPO . After initially planning to price its shares between $33 and $38, strong investor interest pushed the range up  to $41 to $44 per share.  AFRM ultimately priced its shares a at $49. The  stock opened in the secondary market at $90.90 on January 13, more than 85% above the offering price. The stock ended the day at $97.24, more than 98% above its offering price.

Robust Financials

AFRM held its first earnings call as a public company yesterday, presenting solid metrics for its fiscal second quarter ended December 31, 2020. AFRM  delivered total revenue of $204 million, increasing 57% year-over-year. Its gross merchandise volume (GMV) was $2.1 billion, growing 55% compared to the same period last year. The firm added 1.1 million new active users to hit  4.5 million, an increase of 52%. Its transactions per active consumer came in at 2.2, rising 7% year-over-year. AFRM reported an adjusted operating loss of $1.8 million, a significant improvement from its  year-ago loss of $21.9 million.

Weak Management Outlook

AFRM’s management expects its business to face a slowdown in the near-term. In its second-quarter letter to shareholders, the company noted  that it anticipates its GMV to decline to approximately $1.8 billion in the March quarter. Its  top line is also expected to decline, sliding to a range of $185 million to $195 million. Also, AFR’s operating losses appear to be increasing; the company said  it expects to lose $47.5 million to $52.5 million in the third quarter on an adjusted basis, and forecasts losses of $120 million to $130 million for its 2021 fiscal year.

A Difficult  Business Model

Players in the BNPL space make money primarily from two sources. First, the merchant pays the BNPL service provider a specific percentage of the price of the item purchased. Second, the consumer pays interest on the loan. However, unlike other BNPL and credit card companies, AFRM makes most of its money through fees it charges to its merchant partners rather than from borrowers. The company offers interest-free payment options for a six-week plan or simple interest loans for longer terms. In addition, in an effort to build its market presence and reputation,  AFRM does not charge consumers for late payments. This practice has resulted in big  loan losses for the company.

Slowing Post-Pandemic Growth

The fintech space garnered unprecedented prominence in the wake of the coronavirus pandemic as people shifted to remote transactions for  fear of contracting the virus. As a result, the e-commerce boom and digitization of major service industries has triggered rapid adoption of remote financial transactions. However, as global mass vaccination picks up pace this year and the pandemic is contained  many people could return to the old normal and take a pass on digital forms of payment.

POWR Ratings Indicate Bleak Prospects 

AFRM has an overall rating of D, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among  these categories, AFRM has a D grade for Value, which is evident from the stock’s significantly higher-than-industry forward p/s ratio (46.16 vs 4.37).

AFRM has a C grade  for both Stability and Sentiment, indicating that the stock is  volatile compared to its peers and that it commands weak analyst confidence.

Beyond what I’ve stated above, we have also given AFRM grades for Growth, Momentum, Quality, and Industry. Get all the AFRM ratings here.

Of the 83 stocks in the C-rated Technology – Services industry, AFRM  is ranked #69.

Better than AFRM’s rating: Click here to learn about top-rated technology-service stocks.

Bottom Line

AFRM has been gaining prominence among the Gen Y and Gen Z that have lower credit scores to avail loans and cards. AFRM’s ability to attract and retain young consumers today is expected to lead a substantial long-term secular growth. Though the company is committed to innovation and is expanding via partnerships, it faces extreme competition from established fintech players like Paypal Holdings (PYPL) and Afterpay in the BNPL.

Investors have jumped to ride the fintech wave. However, they failed to acknowledge that both the micro and macro environment are not in AFRM’s favor. As a newly listed company, AFRM is yet to prove the sustainability of its operating performance. Thus, we believe, the stock is ridiculously overvalued right now.

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AFRM shares were trading at $127.07 per share on Friday afternoon, down $12.92 (-9.23%). Year-to-date, AFRM has gained 30.68%, versus a 4.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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