Affirm's stock dives after analyst gives reasons investors should sell

By Tomi Kilgore

Piper Sandler analyst Kevin Barker set an $11 stock price target, implying nearly 30% downside

Shares of Affirm Holdings Inc. were knocked down Thursday after Piper Sandler analyst Kevin Barker recommended investors sell, as higher rates and competition hurt revenue and lead to margin contraction.

Barker cut his rating on the buy-now-pay-later (BNPL) operator's stock (AFRM) to underweight, after being neutral for at least the past 2 1/2 years. He initiated an $11 stock price target, which implies 29% downside from Wednesday's closing price of $15.42.

"We expect persistently higher rates to pressure operating margins as [Affirm] needs to hold more loans on balance sheet," Barker wrote in a note to clients. "In addition, we expect tighter underwriting standards, increased pricing and the re-introduction of student-debt payments to cause an incremental slowdown in revenue growth over the next year."

The stock slumped 5.5% toward a six-week low in premarket trading. That puts the stock on track to open roughly 23% below its four-month closing high of $18.85 on June 8.

Affirm generated $32.8 million, or roughly 9% of its fiscal third-quarter revenue, from gains on sales of loans, down from 14.9% in the second quarter and from 17.6% in the first quarter. At the same time, net loans held for investment were valued at $3.23 billion in the third quarter, down from $3.47 billion in the second quarter but well above the $2.19 billion in the first quarter.

Barker said the company has increasingly held loans on its balance sheet because higher interest rates and wider credit spreads have lowered prices in the whole loan market.

Also read: Two-year Treasury yields close to highest since 2006 as jobs data loom.

"Considering rates have remained stubbornly high, [Affirm] should feel incremental pressure from lower gain-on-sale revenue and higher funding costs for loans held on balance sheet," Barker wrote.

Affirm's stock has soared 59.5% year to date through Wednesday, while S&P 500 index has advanced 15.8%.

-Tomi Kilgore

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07-06-23 0800ET

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