After months of underperformance, Affirm Holdings (NASDAQ: AFRM) stock bounced back 66% since it announced its better-than-expected Q3 financials on May 12. Despite this recovery, AFRM stock is still down about 86% from the 52-week high. This includes a decline of about 76% this year alone.
The rising interest rates, high inflation, and credit risk are why shares of financial technology companies, including Affirm, have lost substantial value. Along with macro challenges, higher competition and the weakening of revenue yield (revenue as a percentage of gross merchandise volume or GMV) further remained a drag for AFRM stock.
While the operating environment remains challenging, AFRM continues to scale its network. Its active consumer base has consistently increased over the past year. Meanwhile, transactions per active consumer have improved sequentially in the past two quarters.
Furthermore, the number of active merchants on its platform has surged 1,698% higher on a year-over-year basis in Q3. It’s worth mentioning that AFRM’s active merchant base has improved sequentially in the last six consecutive quarters.
While AFRM continues to grow rapidly, Jefferies analyst John Hecht sees “declining unit economics” as a concern. The analyst expects Affirm’s MDR (merchant discount rate) to compress amid increased competitive activities. Notably, MDR is a fee AFRM charges its merchant partners for each transaction processed through its platform.
Hecht is bearish on AFRM stock, while his price target of $15 represents a downside of about 38%.
Overall on TipRanks, AFRM stock has received seven Buy, six Hold, and two Sell recommendations for a Moderate Buy consensus rating. Further, due to the recent correction, the average price target of $42.43 represents 74.5% upside.
Affirm’s growing scale, multi-year partnerships, and expansion of product offerings provide a solid platform for long-term growth. However, the rising interest rates and high inflation could impact volumes and contribute to higher delinquency rates, which would be a negative for Affirm. Meanwhile, increased competition could hurt MDR and gain on sales of loans, limiting upside potential.
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