Affirm’s stock price has taken a beating over the past six months, shedding 50.4% of its value and falling to $44.70 per share. This might have investors contemplating their next move.
Is there a buying opportunity in Affirm, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Affirm Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Affirm. Here are two reasons why AFRM doesn't excite us and a stock we'd rather own.
1. Previous Growth Initiatives Have Lost Money
Return on equity, or ROE, quantifies bank profitability relative to shareholder equity - an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.
Over the last five years, Affirm has averaged an ROE of negative 20.2%, a bad result not only in absolute terms but also relative to the majority of firms putting up 25%+. It also shows that Affirm has little to no competitive moat.
2. High Debt Levels Increase Risk
Affirm reported $2.25 billion of cash and $9.14 billion of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With $1.04 billion of EBITDA over the last 12 months, we view Affirm’s 6.6× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
Affirm isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 12× forward P/E (or $44.70 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our all-time favorite software stocks.
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