Affirm's pullback, short squeeze potential present a second chance

Key Points

• News of the Affirm network coming to Walmart self-checkout kiosks caused AFRM to gap up 15% on December 19.
• Signs of rising BNPL adoption is a bullish development for Affirm because the company has only scratched the surface in the U.S. retail market.
• Affirm's quarterly update in February could drastically sway the market's opinion one way or the other and set the tone for 2024.

Buy now, pay later (BNPL) leader Affirm Holdings Inc. NASDAQ: AFRM is having a 20% off sale that may be one of the best bargains in retail.

After riding a nine-week win streak to $52.48 on December 27, Affirm shares closed at $41.79 on Friday as traders continued to take profits — one of the early winter's biggest gainers. 

The good news for those who missed the 179% November-December 2023 rally? 

Trading activity on the way down has been light. Weekly volume in the last two weeks was roughly one-third of what it was during the December 2023 surge. It suggests that weak hands are shaken out, and bulls remain in control of the former meme high-flier — and for good reason.

Earlier this month, data from Adobe Analytics revealed that holiday shoppers spent a record $222.1 billion at online merchants. While big discounts on apparel, electronics and toys drove much of the spending, greater use of flexible BNPL payment methods also got some of the credit. With household budgets constrained by inflation and high interest rates, many Americans turned to BNPL alternatives such as those offered by Affirm. 

BNPL purchases increased 14% year-over-year from November 1 to December 31, 2023, to an all-time high of $16.6 billion. They accounted for 7% of total e-commerce spending. Why does this backward-looking data still matter?

First, Affirm has yet to report holiday quarter financial results. While much of the BNPL boom is already built into the stock, we don't know how much Affirm will benefit. When the company reports fiscal 2024 second-quarter results next week, Wall Street's current 30% revenue growth projection may prove too conservative — especially considering Affirm posted 37% top-line growth in fiscal Q1 when it didn't have the holiday shopping tailwind.

Second, the factors that drove record BNPL data this holiday season will likely be around for a while. The December 2023 CPI inflation reading released last week came in hotter than expected, pointing to higher prices for longer and higher credit card rates for longer. 

A looming U.S. government shutdown and escalating Middle East tensions suggest consumer confidence is vulnerable and Americans will be careful about using cash. It's not a good concoction for retailers, but a good omen for the continued use of flexible payment methods.

Why does Affirm Holdings have momentum?

In addition to the recent Adobe Analytics reports, Affirm Holdings has generated bullish news. Last week, it announced partnering with vacation property rental company Evolve to offer pay-over-time options to travelers. It's Affirm's latest step into the travel industry after it signed on travel agency Liberty Travel Partners shortly before Christmas. 

Affirm also has relationships with prominent travel and entertainment companies like American Airlines, Royal Caribbean, Priceline, Kayak and SeatGeek.

Affirm is also making inroads in retail. News of the Affirm network coming to Walmart self-checkout kiosks caused AFRM to gap up 15% on December 19. A major positive is joining forces with a retailer with heavy exposure to lower-income consumers with a greater likelihood of turning to BNPL. Monthly payments via Affirm are also available at Target for purchases over $100.

Signs of rising BNPL adoption is a bullish development for Affirm because the company has only scratched the surface in the U.S. retail market. Its solutions account for just 2% of domestic e-commerce spending and approximately 0.3% of total domestic retail spending. Translation: a massive portion of online and brick-and-mortar retail remains untapped.

Will AFRM stock go up in 2024?

Despite Affirm's apparent holiday success and opportunity to play a bigger role in the $7 trillion U.S. retail space, most analysts have been reluctant to embrace the name. Only three of the 18 research firms that actively cover AFRM consider it a buy. 

One of the biggest bulls, Truist Financial, raised its price target to $60 on Friday. Mizuho Securities sees the stock heading to $65. Conversely, several bears expect AFRM to revert into the $10 to $20 range. In the best-case scenario, AFRM runs 50% from here. In the worst-case scenario, it plunges 70%.

Affirm's quarterly update in February could drastically sway the market's opinion one way or the other and set the tone for 2024. Better-than-expected revenue and margins could spark a reversal to the $50s — a move that a short squeeze could accelerate. Roughly 17% of AFRM's float is held short. A disappointing report (especially after the holiday BNPL hype) could spark a big selloff. Either way, look for fireworks when one of the Nasdaq's most polarizing companies steps to the podium.