Maybe you’re searching for a fintech stock to buy and hold in 2023. That’s fine, but Affirm Holdings (NASDAQ:AFRM) is the wrong pick as the company is still dealing with the fallout from pandemic-era over-hiring. 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 cause problems for Affirm.
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Based in California, Affirm Holdings provides “buy now, pay later” (BNPL) services through a mobile platform. This platform is intended to “show consumers exactly what they will pay up front, never increase that amount, and never charge any late or hidden fees.”
It’s an interesting alternative to credit cards, but Affirm Holdings is particularly vulnerable to changes in interest rates and inflation. Furthermore, it appears that the management’s mistakes of the past are now catching up to Affirm and could cause further fiscal damage to the faltering fintech firm.
Affirm’s Over-Hiring Results in Job Cuts
Not long ago, Affirm Holdings announced job cuts, thereby joining what I call the growing “tech layoff club.” You may have heard about technology companies reducing their headcounts by 5% or maybe 10%. However, Affirm’s 19% workforce reduction is particularly alarming.
For one thing, job cuts of this magnitude could have a negative impact on Affirm’s ability to serve its customers, develop new products and services, and so on. Yet, the large-scale 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 note to Affirm Holding’s employees. After growing quickly in the wake of the COVID-19 pandemic and the tech boom that resulted from this, Affirm “consciously 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 Wall Street Journal.
In other words, Affirm over-hired, and now the company, its shareholders, and 19% of its workers – are paying the price. Granted, Affirm Holding’s management couldn’t have been expected to anticipate high inflation and rising interest rates, which aren’t helpful to a company attempting to operate in the BNPL space. Still, it appears that Affirm got ahead of itself and will have to do more with less in 2023.
Affirm Holding’s 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 approximately doubled from $159.46 million in the year-earlier quarter to $324.01 million in Q4 2022. On a per-share basis, Affirm’s loss widened during that time from $0.57 to $1.10. Moreover, this result missed Wall Street’s forecast of a $0.99 per-share net loss.
Turning to the top line, Affirm Holdings’ $400 million in quarterly revenue missed analysts’ consensus estimate of $416 million. Levchin admitted a “key operational misstep contributing to these results,” explaining that Affirm “began increasing prices for our merchants and consumers later in the year than we should have, and this process has taken us longer than we anticipated.” This “had a negative impact on both our ability to approve more consumers and improve our margin,” the CEO added.
It’s fine to admit fault, but this begs a crucial question: how long will it take Affirm Holdings to correct its prior missteps? Also, prospective investors might wonder whether Affirm’s management will continue to demonstrate errors in judgment during these economically challenging times.
Is AFRM Stock a Buy, According to Analysts?
Turning to Wall Street, AFRM is a Hold based on three Buys, 10 Holds, and one Sell rating. The average Affirm Holdings price target is $14.96, implying 11.1% upside potential.
Conclusion: Should You Consider AFRM Stock?
At best, I am neutral on AFRM stock 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 from Affirm’s management and would likely require 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 about the unfortunate consequences of imprudent executive-level decisions and how difficult it can be to reverse the damage done.
