Affirm Holdings, Inc. (AFRM) recently announced the expansion of its relationship with Amazon.com, Inc. (AMZN). It will serve as Amazon's only “buy now, pay later” option in the United States until January 2023. The San Francisco-based concern will also be integrated into Amazon Pay's digital wallet in the United States. The company also reported quarterly sales of $269.39 million for its fiscal first quarter of 2022, ended September 2021, beating the $248.23 million consensus estimate by 9%.

The stock has gained 138.9% in price over the past three months and 199.8% over the past six months to close yesterday’s trading session at $151.72. 

However, AFRM reported a $1.13 per share quarterly loss, which missed the consensus estimate of 30-cents per share. In addition, it recently witnessed a decline in hedge fund sentiment. Moreover, the company’s losses widened in the first quarter, and it is expected to continue reporting losses in the coming quarters. So, AFRM’s near-term prospects look bleak.

Here is what could influence AFRM’s performance in the upcoming months:

Top Line Growth Doesn’t Translate into Bottom Line Improvement

For its fiscal first quarter ended September 30, 2021, AFRM’s revenue surged 55% year-over-year to $269.39 million. The company’s active consumers increased 124% year-over-year to 8.70 million.

However, its adjusted operating loss for the quarter increased 469.4% year-over-year to $45.09 million. In comparison, its net loss came in at $306.62 million, representing a 7,670.3% year-over-year increase. Also, its loss per share came in at $1.13, up 1783.3% year-over-year.

Stretched Valuation

In terms of forward EV/S, AFRM’s 33.83x is 674.5% higher than the 4.37x industry average. Likewise, its 33.28x forward P/S is 669.3% higher than the 4.33x industry average. Furthermore, the stock’s 20.64x forward P/B is 230.5% higher than the 6.24x industry average.

Lower-than-Industry Profitability

In terms of the trailing-12-month asset turnover ratio, AFRM’s 0.25% is 60.2% lower than the 0.63x industry average. Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative compared to the 8.16%, 4.89%, and 3.62% respective industry averages.

Unfavorable Earnings Estimates

Analysts expect AFRM’s EPS to remain negative in the current quarter, next quarter, current year, and next year. In addition, its EPS is expected to decline at a 34.2% rate  per annum over the next five years.

POWR Ratings Reflect Bleak Prospects

AFRM has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AFRM has a D grade for Quality, which is in sync with its lower-than-industry profitability ratios.

AFRM also has a C grade for Growth and a D grade for Sentiment. These are justified because analysts expect its EPS to remain negative.

The stock has a D grade for Stability, which is consistent with its 1.75 beta . In addition, AFRM has an F grade for Value, in sync with its higher-than-industry valuation ratios.

AFRM is ranked #69 of 74 stocks in the D-rated Technology - Services industry. Click here to access AFRM’s ratings for Momentum as well.

Bottom Line

AFRM’s shares have rallied over the past few months but seem to have reached their peak. Since the company is not expected to turn a profit anytime soon, we think the stock looks overvalued at the current price level. So, it is best avoided now.

How Does Affirm (AFRM) Stack Up Against its Peers?

While AFRM has an overall POWR Rating of D, one might want to consider investing in the following Technology - Services stocks with an A (Strong Buy) rating: NetScout Systems, Inc. (NTCT), Celestica, Inc. (CLS), and Jabil Inc. (JBL).

AFRM shares were trading at $142.45 per share on Thursday afternoon, down $9.27 (-6.11%). Year-to-date, AFRM has gained 46.49%, versus a 26.81% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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