Reduced Funding Costs and GMV Growth to Bolster the Buy Now, Pay Later Pioneer
Shares of Affirm Holdings (AFRM), a leading “Buy Now, Pay Later” (BNPL) company, have been upgraded from “Underperform” to “Neutral,” reflecting a more favorable outlook for the firm in light of potential shifts in interest rates. As interest rates appear set to decline in the coming fiscal years, this environment is expected to lower Affirm’s funding costs and support incremental growth in Gross Merchandise Volume (GMV), according to analysts. Here’s a closer look at what’s driving this shift and what lies ahead for the company.
A More Favorable Rate Environment
A key driver behind the upgrade is the expectation of a lower interest rate environment, which could provide substantial benefits to Affirm’s business model. The BNPL firm relies on borrowed capital to fund customer purchases, making lower rates especially advantageous.
The forward curve suggests a potential 100 basis point decline in rates during fiscal 2025, which is expected to translate into a 40 basis point improvement in Affirm’s Revenue Less Transaction Costs (RLTC) as a percentage of GMV. This margin expansion, however, could take a few quarters to materialize, with the impact likely to be felt two to three quarters after the rate drop.
In order to maintain a target RLTC margin between 3% and 4%, the company might choose to loosen its underwriting standards, which could drive further GMV growth. This approach balances maintaining profitability while potentially expanding its customer base, a strategy that could position Affirm for more stable, long-term growth in a lower-rate landscape.
Solid Credit Quality and Economic Headwinds
Affirm’s credit quality has been strong, consistently outperforming expectations in the face of a high-rate environment over the past couple of years. The company’s products, characterized by shorter durations, have helped mitigate risk exposure to default or non-payment, even during tougher economic times.
As the broader economy faces uncertainty, Affirm’s near-term prospects remain optimistic, with analysts predicting a “soft landing” scenario—where inflation cools without triggering a significant economic downturn. However, the risk of a recession still looms, especially as major retailers have expressed concerns about the health of the consumer market. Should unemployment rise, Affirm’s risk profile would heighten, as BNPL customers may struggle with payments if economic conditions worsen.
Despite these concerns, Affirm’s valuation continues to command a premium compared to traditional consumer finance lenders. While this has raised some eyebrows, analysts point to the company’s growth potential and recent partnerships, which could support long-term gains.
Growth Catalysts: Apple Pay Partnership and UK Expansion
A significant part of Affirm’s future growth could come from its recently announced partnership with Apple Pay. Though the deal is non-exclusive, meaning Affirm faces competition, the integration of BNPL into Apple’s vast payment network should unlock incremental GMV growth.
Other sources of GMV growth include Affirm’s foray into the UK market and its B2B product offerings, though analysts caution that these initiatives are still in the early stages. As such, their contributions to GMV growth in fiscal 2025 are likely to be modest.
Another promising development is the Affirm Money account, a savings and spending account service, which adds a new revenue stream for the company. While this initiative is also in its nascent phase, it signals the company’s ambition to broaden its portfolio of financial services.
Improving Margins and Revised Estimates
Affirm is on track to surpass its medium-term margin goals, which call for an adjusted operating margin of 5% to 15%, provided the company achieves revenue growth of more than 20%. For slower growth periods, the target rises to 20%-30%. Fiscal 2025 guidance has already set an impressive operating margin of more than 18.4%, indicating that the company is ahead of schedule in reaching its targets.
As a result, analysts have raised their earnings estimates for Affirm, now forecasting GAAP EPS of -$0.23 for fiscal 2025, a significant improvement from previous expectations of -$0.60. Additionally, the firm’s price target has been increased from $25 to $45, reflecting a stronger outlook tied to the company’s operational progress and anticipated growth.
Conclusion: Balanced Risk-Reward Outlook
Affirm’s upgraded “Neutral” rating reflects the balanced risk-reward dynamics at play. On one hand, the company stands to benefit from a more favorable interest rate environment, which should reduce funding costs and fuel incremental GMV growth. On the other hand, risks such as rising unemployment and potential recessionary pressures could temper its outlook.
Affirm remains a premium player in the BNPL space, commanding a valuation higher than traditional lenders. However, with promising partnerships, expansion into new markets, and progress on margin targets, the company’s long-term growth prospects appear intact—albeit with some caution surrounding broader economic trends.
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