Affirm stock sinks as loss more than triples, bank stress and rising rates spark concerns

By Jeremy C. Owens

Buy-now, pay-later company beats expectations across the board with quarterly results, but stock slumps 8% in after-hours trading amid concern about funding environment

Affirm Holdings Inc.'s wounded shares sank anew Tuesday afternoon, as the buy-now, pay-later service saw losses more than triple in its most recent quarter and faced interest-rate concerns.

Affirm (AFRM) reported a fiscal third-quarter loss of $205.7 million, or 69 cents a share, more than three times the loss of 19 cents a share recorded in the same quarter a year ago. Net revenue increased to $381 million from $355 million last year, while gross merchandise volume -- the total amount of money passing through the platform, referred to as GMV -- grew to $4.6 billion from $3.9 billion.

The results beat reduced expectations across the board. Analysts on average were predicting a loss of 85 cents a share on sales of $370 million and gross volume of $4.45 billion, according to FactSet.

Despite topping expectations, Affirm shares sank about 8% in after-hours trading following the release of the results, after gaining 3% to $12.30 in the regular session. The stock -- which traded for triple digits through much of the second half of 2021 -- has dropped 39.8% in the past year, as the S&P 500 index has gained 3.7%.

Concerns about rising interest rates and bank failures, and their effects on what the company will have to pay to service its debts, could have affected the stock. In their letter to shareholders, executives acknowledged that higher credit spreads could affect the company's revenue less transaction costs, or RLTC, a metric that executives says measures the economic value of the transactions it processes.

"The bank failures and overall system stress in FQ3'23 are likely to continue to impact funding markets in the near term. We believe this volatility will lead to creditspreads remaining elevated for some time," the executives wrote. "On a year-over-year basis, we expect higher funding costs to remain a headwind to RLTC as a percentage of GMV for the next few quarters, in part because of the repricing lag that occurs with our fixed-rate funding debt."

"Credit spreads for all asset classes, including ours, are going to widen at times in these moments of pretty peak economic dislocation," Chief Executive Max Levchin said in a conference call. "It is just an unfortunate reality of the world right now that things are extremely volatile."

Jefferies analysts referred to that dynamic in a note summarizing the report, writing that the issue means they "continue to see downside to results and valuation multiples."

"Despite guidance in line with street expectations, we continue to see risk to margins from higher cost of funds, and increased competition," the analysts wrote, while maintaining an underperform rating and $8 price target.

For the fiscal fourth quarter, Affirm executives guided for revenue of $390 million to $415 million on gross merchandise volume of $5.2 billion to $5.35 billion. Analysts on average were expecting net revenue of $390 million on volume of $5.12 billion.

Affirm's shares have struggled as growth from a pandemic boom in its core business of offering e-commerce customers a form of digital layaway has fizzled. The company announced that it would lay off nearly 20% of staff in its last quarterly earnings report, and executives have focused on increasing prices and avoiding credit risks to march toward profitability.

"It appears a large portion of Affirm's customer applications aren't being convertedinto loans ($12B in applications a quarter vs. $4.45B GMV expected in March qtr), in part because of Affirm's efforts to ensure better credit quality," Morgan Stanley analysts wrote in an earnings preview Monday. "We're curious to see how relationships with customers that have been declined loans more frequently will evolve as well as how management will focus investments on retaining and attracting better quality/higher FICO borrowers (who are more profitable) long-term."

In a letter to shareholders, Levchin termed it "an excellent quarter," but cautioned that there is still a lot to do as Affirm repositions.

"To use a cycling analogy, we are in the middle week of a three-week grand tour," he wrote. "Team Affirm is on form and highly motivated to win, but we are also very clear-eyed about the hard climbs and the long endurance stages to come."

Chief Financial Officer Michael Linford reaffirmed that the company expects to be profitable on an adjusted operating-income basis by the end of the fiscal year.

-Jeremy C. Owens

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05-09-23 2014ET

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