Afirm Holdings Stock: Major Catalyst Ahead (NASDAQ:AFRM)

Affirm Holdings (NASDAQ: AFRM) surged on Thursday as investors digested the fintech’s strong quarterly earnings, which were released after the market closed on Wednesday. Firm Holdings, focusing on buy-now-pay-later products, saw sales rise 48% year-on-year amid strong demand for credit cards alternatives.

The fintech is now growing its buy-to-let platform, pays later at scale, and has easily beaten Wall Street’s profit targets. I think Affirm Holdings has a long upside and with the fintech now also targeting positive GAAP earnings next financial year, the risk/reward ratio is tilted to the upside.

My rating history

A strong growth now, pay later story supported my Buy stock rating for Affirm Holdings in my previous June article.

BNPL products are growing in popularity and Affirm Holdings is one of the biggest fish in the world the pond in the BNPL market. The fintech reported soaring sales last quarter and also delivered a strong forecast: Affirm Holdings estimates GAAP operating profitability in the fourth quarter of this financial year.

The central bank is also set to cut short-term interest rates at the September Fed meeting, potentially boosting demand for buy-now-pay-later fintech products.

Robust 4Q24 profit beat, excellent results

Affirm Holdings reported a loss of $0.14 per share for the quarter ended June 30, 2024, compared to a Wall Street target of $0.48 per share.

In addition to beating profit estimates by a wide margin, the fintech is now on track to achieve operating profitability on a GAAP basis in the fourth quarter of the current financial year.

Affirm Holdings posted sales of $659 million in Q4, reflecting a staggering 48% growth. This growth is supported by buy now, pay later fintech products that offer consumers the ability to pay off consumer debt in installments. This relatively new industry is growing rapidly (as I illustrated in my June article) and buy now pay later tools are replacing credit cards.

As a result, Affirm Holdings benefits from sustained growth in gross merchandise volume, a key figure that is used to quantify how many dollars are processed through a payment or commerce system. In 4Q24, Affirm Holdings produced $7.2 billion in gross merchandise volume, reflecting a 31% year-over-year increase.

A sizable source of income for Affirm Holdings, of course, is interest income. As the fintech grows the amount of loans on its books, so does the amount of interest income it collects on those loans.

In 4Q24, Affirm Holdings’ interest income totaled $283 million, reflecting a 211% increase over the past two years. Over the past year, fintech has produced 64% year-on-year growth in this key revenue measure.

Affirm Holdings is also heading toward an important inflection point in its business: positive GAAP operating income. The fintech pointed to positive operating income for the 425th quarter.

Affirm Holdings has seen a steady reduction in operating income losses, and the company has now finally provided much-needed profit visibility.

1Q25 sales forecast and valuation multiples

The fintech forecast sales of between $640 million and $670 million for the next quarter, which was substantially better than the average Wall Street target of $625 million. The sales forecast and GAAP operating profit guidance catapulted shares of Affirm Holdings 32% higher on Thursday.

Firm Holdings’ sales estimates have risen considerably over the past two months as well, and with the current 1Q25 sales outlook crushing the consensus view, there’s a good chance the market will further revise down the fintech’s sales projections.

The market is currently modeling sales of $2.92 billion for this year, $160 million more than when we last reviewed Affirm Holdings in June. For next year, $3.55 billion is now booked as consensus sales, which, based on a market valuation of $12.9 billion, reflects us at a leading sales multiple of 3.6x. That multiple isn’t an outrageous sales multiple at all, given the aggressive sales growth the fintech sustained for its most recent quarter.

SoFi Technologies, Inc. (SOFI) is selling for a 2024 sales multiple of 3.0x, while Upstart Holdings, Inc. (UPST)which provides AI technology to help banks and credit unions make credit decisions, sells for 5.3x sales.

At the start of the year, Affirm Holdings was trading at more than 5.0x sales, implying an estimated intrinsic value of $50. That target leaves 17% on the table for investors.

The big catalyst that I think could help Affirm Holdings sustain its momentum right now and re-rate to $50 is the first rate cut that the central bank implicitly guided for in August. Lower short-term interest rates imply lower debt (re)financing costs, making BNPL’s debt more attractive to consumers.

A gradual fall in borrowing costs would likely give a substantial boost to fintechs like Affirm Holdings, which could push BNPL to a higher volume of loans.

Why the investment thesis might not work

Affirm Holdings is poised to be a beneficiary of lower interest rates. After an encouraging inflation report for July (prices rose just 2.9% year-on-year that month), the central bank is expected to start cutting interest rates at the Fed’s next meeting in September.

But there are also risks, such as slowing adoption of BNPL during a recession, which would likely hit cyclically positioned fintechs that rely on credit products harder than more diversified banks.

A recession could also cause credit defaults, which would hurt Affirm Holdings as it holds BNPL origination loans on its books.

My conclusion

Affirm Holdings just finished a fantastic quarter. BNPL’s fintech sales are soaring and Affirm Holdings is clearly well-positioned to benefit from lower interest rates in the market as it would likely boost demand for personal loans.

The guidance from Firm Holdings and especially the outlook for positive operating income in 4Q25 are inflection points for fintech and I think investors are looking at many years of supercharged growth for the buy now, pay later company BNPL is getting more popular and acting as substitutes of credit cards.

The valuation multiple also has room to expand, and I reaffirm my $50 price target on Affirm Holdings stock.