In the past few months, the sell-off in growth stocks has accelerated amid a volatile and extremely tricky macro environment. Several factors have negatively impacted investor sentiment, that include rising inflation rates, the possibility of multiple interest rate hikes, a new and contagious COVID-19 variant, and what many investors believe to be an overvalued equity market.
However, the fintech market is expected to grow at a CAGR of 26.87% over the next four years, which currently makes beaten-down stocks, such as Affirm (AFRM) and Block (SQ), potentially interesting long term investments. AFRM and SQ are currently trading down 73% and 57%, respectively, in the past three months.
Today I’ll analyze and compare both fintech stocks to determine which is currently the better buy.
The bull case for Affirm
Shares of Affirm have been in a freefall since November 2021. AFRM stock has in fact declined by almost 50% since February 9 this year. In Q2 of fiscal 2022 that ended in December, Affirm reported sales of $361 million and adjusted losses of $0.57 per share. Its revenue was up 57% year over year while losses stood at $0.38 per share Q2 of fiscal 2021. Comparatively, Wall Street forecast Affirm to report revenue of $328.8 million and a loss of $0.34 per share in the quarter which drove the stock lower.
However, merchants on Affirm rose 64% on a sequential basis to 168,000 as the company confirmed it processed 1.6% of total online purchases on Black Friday and Cyber Monday last year. It ended Q2 with an active user base of 11.2 million, up 150% year over year. Affirm’s gross merchandise volume or the value of transactions on its platform increased by 152% to $4.4 billion in Q2 as it partnered extensively with giants such as Amazon and Shopify.
Affirm sales are forecast to grow by 51% to $1.32 billion in fiscal 2022 and by 44.7% to $1.91 billion in 2023. Its adjusted losses per share might narrow from $2.72 in 2021 to $1.84 in 2023.
The bull case for Block
Formerly known as Square, Block is valued at a market cap of $56 billion. Despite the recent pullback, it has returned 661% to investors since its IPO in November 2015. Block successfully displaced legacy point of sales (POS) solutions as it allowed small and medium businesses to conduct transactions on most mobile devices. Its seller ecosystem expanded at an accelerated pace as the company expanded its product portfolio to include payroll and data analysis tools.
Its peer-to-peer payment application called the Cash App unlocked massive opportunities for Block. Here, users can use a debit card, trade equities, and cryptocurrencies as well as manage taxes.
Earlier this year, Block completed the acquisition of Afterpay, an Australian-based buy now pay later company in an all-stock transaction valued at $29 billion. The acquisition should serve Block’s seller and cash app verticals and is viewed as a welcome expansion to its product family.
Block’s Q3 sales rose by 27% year over year to $3.84 billion while its gross profit soared by 42% to $1.13 billion. Its sales are forecast to grow by 86% to $17.68 billion in 2021 and by 6.5% to $18.83 billion in 2022. Comparatively, Wall Street expects adjusted earnings per share to rise from $0.84 to $1.75 in this period.
Affirm is valued at a forward price to 2023 sales multiple of 5.6x while Block’s ratio is less than 3x. Block is also a much larger company and consistently reports an adjusted profit, making it a better buy than Affirm.
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REVISED: 2023 Stock Market Outlook (includes top 7 picks)
AFRM shares were trading at $37.38 per share on Tuesday morning, up $0.05 (+0.13%). Year-to-date, AFRM has declined -62.83%, versus a -8.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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