Affirm Holdings (NASDAQ: AFRM) stock was up 30% after hours Friday. AFRM stock jumped on the earnings report which was a both earnings and revenue beat. Or, to be more accurate, less of a loss and more revenue. Which is where the controversy over whether it’s really worth it comes in. Sure, it takes time for a company to grow revenues to match the cost base - this is why we have capital markets after all. To provide the capital to fund that growth. But we do always need to ask ourselves whether revenue will ever grow to the point that profits appear? And the answer is, for some firms at least, no, they won’t. So, that becomes the question to ask about any company - because some really do fail this test.
As to what’s done at Affirm: “Affirm Holdings, Inc. operates a platform for digital and mobile-first commerce in the United States, Canada, and internationally. The company’s platform includes point-of-sale payment solution for consumers, merchant commerce solutions, and a consumer-focused app. Its commerce platform, agreements with originating banks, and capital markets partners enables consumers to pay for a purchase over time with terms ranging up to 60 months. The company has active merchants covering small businesses, large enterprises, direct-to-consumer brands, brick-and-mortar stores, and companies with an omni-channel presence.” We can also call this a “buy now pay later” firm. Or even a supplier of consumer credit.
Which is where the valuation problem comes in. Is this just yet another provider of consumer credit? To be valued as with a small-scale bank say? Or is this some whizzy new technology form that has cracked a new market? Opinions, as they say, differ. For one of the things we know very well is that over history all sorts of people have claimed new ways of lending and they so often fall into the same trap - loading to those who are not worth lending to.
Affirm Holdings stock price from Google Finance
The results are better than expected: “Affirm Holdings, Inc. beats earnings expectations. Reported EPS is $0.69, expectations were $-0.86.” Well, that report is wrong but that’s the financial press for you. The earnings beat was $-0.69. That is, smaller losses than expected. Revenue was up: “Revenue of $445.8M beats by $39.72M.” The revenue beat is largely what produced the earnings beat there.
But this still leaves us with two questions. The first is, well, will earnings ever grow to cover all costs so that profit is made? The other is, well, is this some new whizzy tech company? Or just a different way of doing that same old thing, consumer credit? So, which valuation should apply? Whizzy tech or boring old consumer credit?
The answer is likely to come in the next recession when we see what the failure rate of the loans is going to be. So, until that test we’ve uncertainty.
