Why Affirm’s Downgrade is an Opportunity for Long-Term Investors
A recent Wall Street sell recommendation is far too short-term focused. Longer-term investors should look at these more important metrics instead.
October 25, 2023
Earlier today, Compass Point downgraded the shares of Affirm Holdings (Nasdaq: AFRM) to sell and issued a price target of $13.00. The downgrade appears to have triggered a market selloff, as shares of Affirm are down 17% in Wednesday trading to $16.24.
In his report, analyst Giuliano Bologna mentioned the following:
“As the loan sale environment remains challenging with higher interest rates, increasing concerns about the macro backdrop and consumer credit, we believe the risk of the environment remaining under pressure for a few more quarters is high and that it is too early to call for an inflection.”
“At the same time, we believe consensus estimates are already pricing in a reasonable FY24 GMV at $24.3B compared to guidance of more than $24B as of last quarter and that margin upside would likely come from a re-acceleration in GMV growth and an improving loan sales environment.”
And then finally:
“Putting this together, we believe the near-term setup has more downside risks for AFRM shares and that the upside optionality is more limited.”
If you’re a short-term trader or market speculator, these things might be important. After all, we are indeed in a rather funky macroeconomy that’s serving as quite a headwind for consumer discretionary purchases.
And for companies like Affirm — who borrow money to lend to consumers in order to make purchases of high-dollar items — that certainly could put a damper on short-term gross merchandise volumes and revenues.
Compass Point just picked up Affirm earlier this summer. Back in June, they initiated coverage with a “Neutral” rating and issued a $14.50 price target. In that report, they acknowledged Affirm’s “attractive unit economics” had the potential to scale and to leverage its cost base over time.” But it also said the stock’s [premium] valuation “keeps us on the sidelines for now.”
But this sell recommendation is really missing the bigger-picture. Affirm is accomplishing some incredible things right now, which astute investors should be paying more attention to.
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