Shares of Affirm Holdings, Inc. (NASDAQ: AFRM) tumbled by 13.91% on Thursday following a downgrade by Piper Sandler analyst Kevin J. Barker. The stock was downgraded from Neutral to Underweight, with a price target of $11.00.
Barker’s downgrade was driven by concerns over the impact of persistently higher rates on AFRM’s operating margins. He believes that AFRM will need to hold more loans on its balance sheet, which will put pressure on the company. Barker also expects tighter underwriting standards, increased pricing, and the reintroduction of student debt payments to contribute to a slowdown in revenue growth over the next year.
According to the analyst, AFRM’s revenue growth has already decelerated in the past two quarters, reaching only 11% and 7%. This slowdown can be attributed to the company holding more loans on its balance sheet. AFRM heavily relies on loan sales for revenue generation, but due to higher rates and wider credit spreads, the company has been forced to keep more loans on its books.
Barker believes that AFRM will face challenges in achieving the 24% revenue growth expected by consensus estimates. The analyst notes that AFRM will experience increased funding costs for loans on its balance sheet, with funding costs expected to rise to 7.0% of originations in 4Q23 from 6.2% in 3Q23. He also highlights the recent upward movement in the 3-month and 2-year Treasury rates, indicating further pressure on AFRM’s funding costs.
Affirm has enjoyed substantial growth, with a 70% increase in revenue from FY21 to FY22, and has gained market share as more consumers embraced buy now, pay later (BNPL) payment methods.
However, sustaining this growth has become increasingly challenging as competitors with established networks offer BNPL products as value-added services, rather than relying on them for profits. These competitors primarily focus on driving network volume through short-duration products, which tend to cater to smaller order sizes. In response, Affirm has shifted toward longer-duration products.
Barker believes that Affirm’s move into longer-duration products will expose the company to greater credit and interest rate sensitivity, ultimately leading to a lower stock multiple in the long term.