Goldman Sachs Raises Stock Target for Affirm: Key Insights

Key Points

• Goldman Sachs saw enough evidence in Affirm to give the stock a buy rating and raise its valuation to $42 a share. 
• The company's financials and key performance indicators show investors why this stock does justify Goldman's view. 
• Despite inflation and rising credit card delinquencies, Affirm's customers are of higher-than-average quality. 

Despite what most market investors may believe, the new business model taking over the consumer discretionary sector and even the financial industry is here to stay much longer. Known as buy now, pay later (BNPL), this business model is precisely what today’s consumer needs as the U.S. economy remains somewhat directionless.

Inflation-choked consumers have had to resort to credit, which is not working today. According to reports by banks like Bank of America and other financial institutions, credit card delinquencies have been rising lately. Investors can check this trend inside the Federal Reserve’s economic data website and notice how delinquencies are now back to levels not seen since the fourth quarter of 2011.

Because credit cards are becoming a less viable option for consumers, this BNPL service brings consumers a lifeline. There is one major company in the space, with few competitors, that stock is Affirm Holdings Inc. NASDAQ: AFRM, and its path to help today’s consumer has earned it some of Wall Street’s love; here’s how.

Keeping Up with Affirm: The Main Drivers Fueling Stock Growth

Shares of Affirm are now trading at 60% of their 52-week high prices, which would be synonymous with the term ‘beaten down.’ However, investors will find many reasons why this price level is unjustified, all within the company’s third quarter 2024 quarterly earnings release.

Starting with some of Affirm’s key performance indicators (KPIs), here’s what investors will immediately notice. Gross merchandise volume grew to $6.3 billion, or 36% over the year. This roughly translates into $576 million in revenue, which also jumped by an attractive 51% over the year.

Gross profits finished the quarter at $231 million, advancing by 38% annually. When it comes to net income and earnings, investors should watch out for what some call ‘creative accounting’ or other tactics used by management to make it seem like the company made more money than it actually did.

A more accurate proxy for earnings can be found in a company’s cash flow statement, specifically in the operating cash flow total. For Affirm, $208.1 million made it to the operating cash flow line item, compared to a net operating outflow of $54.2 million.

To keep this trend up, investors may wonder what needs to happen behind the scenes. The answer is more of the same. Affirm reports 18.1 million active consumers, which grew by 9.6% over the year. More than just customers, Affirm needs merchants to start adopting its services and trust that it will work with its products.

Total active merchants grew to 292,300 from 254,100 a year prior, or 15% growth. Such high adoption rates from consumers and merchants could bring the company to continued profitability. Here’s how management feels about the future.

Insiders' 2024 guidance shows that Affirm's gross merchandise value will be $6.7 billion to $6.9 billion, much higher than today's. Revenue guidance also indicates expected growth of roughly $20 to $30 million.

No Need to Worry: Analysts Are Positive on the Company

Despite national credit card delinquencies rising, Affirm's customers seem to be doing okay. Affirm does not report to the leading credit agencies, so if an account is delinquent, it does not affect a customer's FICO score. Customers seem more responsible than otherwise.

Affirm’s shareholder letter will show investors that 30+ day delinquencies have declined annually for its customers, unlike delinquencies seen across the nation’s commercial banks.

This quality of credit, coupled with double-digit KPI growth, led analysts at Goldman Sachs to place a buy rating on the stock alongside a price target of $42 a share. Considering where the stock trades today, that valuation would present an upside of up to 33.7%.

But these analysts weren’t the only ones on Wall Street who became bullish on Affirm stock lately. The Vanguard Group boosted its stake in the stock by 4.1% as of March 2024, bringing its net position up to $958.6 million today.

Moreover, Affirm stock’s price-to-sales (P/S) ratio of 6.1x stands at a premium above the personal credit institutions industry’s average P/S valuation of 2.0x. There must be a good reason markets are willing to pay a premium to gain exposure to Affirm’s future sales, especially in today’s economy.