Affirm Holdings Stock (NASDAQ:AFRM): Wrong Fintech Pick for 2023

Maybe you’re looking for a fintech stock to buy and hold in 2023. That’s fine, but Affirm Holdings (NASDAQ:AFRM) is the wrong choice since the company is still dealing with the consequences of overemployment from the pandemic. I am neutral on AFRM stock because the company’s recent results were disappointing and because an inflation-driven pullback in customer spending is likely to spell trouble for Affirm.

Based in California, Affirm Holdings offers “buy now, pay later” (BNPL) services through a mobile platform. This platform is meant to “show consumers exactly what they will pay upfront, never increase that amount, and never charge anyone late or hidden fees.”

It is an interesting alternative to credit cards, but Affirm Holdings is particularly vulnerable to changes in interest rates and inflation. Furthermore, it appears that management’s past mistakes are now catching up with Affirm and could lead to further tax damage to the faltering fintech firm.

Affirm’s overhiring results in downsizing

Not long ago, Affirm Holdings announced layoffs, joining what I call the growing “tech layoff club.” You may have heard of tech companies cutting staff by 5% or maybe 10%. However, Affirm’s 19% reduction in its workforce is particularly alarming.

First, cutbacks of this magnitude could adversely affect Affirm’s ability to serve its customers, develop new products and services, and so on. Nevertheless, the large layoffs also reflect the questionable decisions that Affirm Holdings’ management has made.

“The root cause of where we are today is that I acted too slowly as these macroeconomic changes unfolded,” CEO Max Levchin admitted in a memo to Affirm Holdings employees. Having grown rapidly in the wake of the COVID-19 pandemic and the resulting tech boom, Affirm “deliberately hired ahead of the revenue required to support the size of the team.” Now, the company “expects to pay between $35 million and $39 million in restructuring costs,” according to the report The Wall Street Journal.

In other words, Affirm overstaffed, and now the company, shareholders and 19% of workers are paying the price. Admittedly, Affirm Holdings management could not be expected to foresee high inflation and rising interest rates, which is not helpful for a company trying to operate in the BNPL space. Still, it seems Affirm got ahead of itself and will have to do more with less in 2023.

Confirm Holdings’ net loss nearly doubles

It’s one thing to have a rough quarter; practically doubling a company’s net loss is another matter entirely. Mizuho analyst Dan Dolev said he was “disappointed” in Affirm Holdings’ fourth-quarter 2022 results, and you’ll probably agree that the data is problematic.

As I see it, here’s what was most disappointing of all: Affirm Holdings’ net loss roughly doubled from $159.46 million in the year-ago quarter to $324.01 million in Q4 2022. On a per-share basis, the Affirm’s losses during that time ranged from $0.57 to $1.10. Also, this result missed Wall Street’s forecast of a net loss of $0.99 per share.

As for the top line, Affirm Holdings’ $400 million in quarterly revenue missed analysts’ consensus estimate of $416 million. Levchin admitted to a “key operational misstep that contributed to these results,” explaining that Affirm “started raising prices for our merchants and consumers later in the year than we should have, and this process has taken us longer than we expected.” This “had a negative impact on both our ability to approve more consumers and improve our margin,” the CEO added.

Admitting mistakes is fine, but this raises a crucial question: how long will it take Affirm Holdings to correct past mistakes? Potential investors may also wonder whether Affirm’s management will continue to demonstrate lapses in judgment in these financially challenging times.

Is AFRM stock a buy, according to analysts?

In terms of Wall Street, AFRM is a hold based on three buys, 10 holds and a sell rating. The average price target for Affirm Holdings is $14.96, indicating 11.1% upside potential.

Conclusion: Should You Consider AFRM Shares?

At best, I am neutral on AFRM shares as the BNPL market has the potential to recover and this could benefit Affirm Holdings and its shareholders. On the other hand, a turnaround would require better decision-making by Affirm’s management and would likely take months or even the rest of 2023 to implement.

So it’s probably not a good time to consider a position in AFRM stock. Just take it as a lesson in the unfortunate consequences of careless decisions at the executive level and how difficult it can be to reverse the damage done.

Mediation