Is It Time to Sell Your Affirm Stock Holdings?
Affirm, a prominent consumer credit firm listed on the NYSE under the ticker AFRM, derives a substantial portion of its revenue from buy-now-pay-later (BNPL) payment solutions. This model allows customers to acquire products or services immediately and repay the amount, including interest, over an extended timeframe. Proponents of BNPL highlight its benefits in enabling access to purchases that might otherwise be out of reach for many individuals. However, detractors point out that it closely resembles conventional consumer lending practices, often featuring elevated interest rates that raise concerns about affordability and sustainability.
Why Affirm Faces Heightened Risks
Recent developments have unsettled investors, particularly following former President Donald Trump’s proposal to enact legislation capping credit card interest rates at 10%. This suggestion has triggered declines in stock prices among several major financial institutions. Although such a cap is improbable to materialize into actual law in the near term, it nonetheless draws attention to contentious aspects within the personal finance industry. For companies like Affirm, whose operations already face scrutiny over their lending models, this kind of spotlight represents an unwelcome challenge that could erode investor confidence further.
Beyond external political pressures, Affirm’s internal strategies amplify its vulnerabilities. The company pursues more aggressive lending tactics than many peers, characterized by high leverage ratios, a heavier dependence on riskier borrower profiles, and extended loan terms. In contrast to typical BNPL providers, which generate approximately half their income from merchant fees for facilitating transactions, Affirm relies on this stream for just about a quarter of its revenue. This structure leaves it far more exposed to fluctuations in interest earnings from end consumers.
Such dependencies heighten Affirm’s susceptibility to economic headwinds. A decelerating US economy could easily trigger a modest increase in loan default rates among its customer base. Moreover, if Affirm’s internal assessments of borrowers’ credit reliability turn out to be overly lenient, the repercussions could be severe, straining the company’s financial health significantly.
Challenges extend to the broader market dynamics as well. Even a moderation in the BNPL sector’s explosive growth trajectory poses threats. Affirm’s current stock valuation hinges on expectations of robust revenue and profit expansion. Trading at an eye-watering 152 times its trailing earnings and 6.8 times sales, the shares reflect aggressive growth assumptions. Projections anticipate some contraction in these multiples over time, yet the stock remains priced at 44 times forecasted 2027 earnings—a premium that leaves little margin for error.
Over the past two years, Affirm’s share price has nearly doubled, showcasing remarkable gains amid favorable conditions. However, momentum appears to be waning, as evidenced by a notable decline over the preceding six months. The stock is now positioned below its 50-day moving average, signaling fading investor interest. Given these indicators, considering a short position at the prevailing price around $72 (with an exchange rate of £25 per $1) may warrant attention. A prudent stop-loss level at $111 would limit potential losses to approximately £975, providing a structured risk management approach in this volatile environment.
