Affirm Holdings, Inc. (AFRM) is a provider of digital payment solutions in the United States and Canada. The company made its stock market debut on January 13. It offered 24.60 million shares priced at $49.

On the stock’s first trading day it soared 110.2% to hit an intraday high of $103. It hit its all-time high of $140.50 on February 11.

However, shares of AFRM have been losing momentum since. The stock has declined 61.8% over the past three months, and 29.3% over the past month. Despite such steep share-price declines, we think the stock is still overvalued. This, coupled with its weak fundamentals, make it best avoided now.

Here’s what could shape AFRM’s performance in the near term:

Growth Prospects

AFRM has been taking steps to solidify its position in the financial services and payments industry. On May 3, the company acquired Returnly, a leading player in the post-purchase payment and online return experiences segment of financial services. This move should allow AFRM to grow its merchant customer base by increasing their clientele through diversified payment solutions and post transaction customer care. However, investors should note that the acquisition is not expected to have any material impact on AFRM’s financials in the second half of its fiscal year 2021, as stated by the company.

Also, the company has partnered with Ulla Johnson to provide direct payment getaway and EMI payment options to potential shoppers. Given Ulla’s immense market reach, this collaboration is expected to have  a positive impact on AFRM’s revenues.

Bleak Financials

AFRM’s trailing-12-month revenue came in at $762.02 million, representing a 92.7% improvement year-over-year. However, the company has  yet to generate profits from operations. Its trailing-12-month operating profit and net income stood at negative $190.20 million and $242.90 million, respectively. The company’s net operating cash outflows was $201.66 million over the past year.

AFRM’s trailing-12-month return on sales and levered free cash flow margin came in at 31.88% and 14.3%, respectively. Furthermore, its ROE and ROTC margins are negative. Its trailing-12-month CAPEX/Sales and asset turnover ratio of 1.93% and 0.4%, respectively,  are significantly lower than industry averages.

Stretched Valuation

In terms of forward EV/Sales, AFRM is currently trading at 16.35x, which is 303.3% higher than the 4.05x industry average. And its forward 15.85 Price/Sales multiple is 291% higher than the 4.05 industry average.

Also, the company’s 5.48 trailing-12-month Price/Book ratio is 9.5% higher than the 5.01 industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of nine Wall Street analysts that rated the stock, five rated it Buy while four rated it Hold. AFRM has a $80.78 12-month median price target, indicating a 64.8% potential upside. The stock’s price target ranges from a low of $67 to a high of $102.

POWR Ratings Reflect Bleak Outlook

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

AFRM has a grade of D for Value and Sentiment. The company’s higher-than-industry valuation metrics justify the Value grade. Moreover, analysts expect AFRM’s EPS to remain negative until at least 2022, accounting for the unfavorable Sentiment grade.

Of the 74 stocks in the C-rated Technology – Services industry, AFRM is ranked #54. Beyond what we have stated above, one  can view additional AFRM Ratings for Stability, Growth, Quality and Momentum here.

Click here to view the top-rated stocks in the Technology – Services industry.

Bottom Line

While AFRM’s stellar IPO attracted many investors, the company’s growth potential seems bleak. Also, without adequate cash flows and earnings, AFRM’s fundamentals don’t justify its current valuation, despite the recent dip. Thus, the stock is best avoided now. 

AFRM shares fell $0.01 (-0.02%) in after-hours trading Thursday. Year-to-date, AFRM has declined -50.26%, versus a 10.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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