Standing out among the Street's worst performers today is Affirm, a diversified financial company whose shares slumped -8.0% to a price of $30.76, 13.89% below its average analyst target price of $35.72.
The average analyst rating for the stock is hold. AFRM underperformed the S&P 500 index by -8.0% during today's afternoon session, but outpaced it by 77.3% over the last year with a return of 100.5%.
Affirm Holdings, Inc. operates a platform for digital and mobile-first commerce in the United States, Canada, and internationally. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
Affirm does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-1.53 and $-2.22. We can see that AFRM has a forward P/E ratio of -20.1 and a trailing P/E ratio of -13.9. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the finance sector has an average P/E ratio of 15.89, and the average for the S&P 500 is 27.65.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Affirm market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing Affirm's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.17. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Affirm's free cash flow, which was $-108594000 as of its most recent annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In AFRM's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-141655400.0 and they've been growing at an average rate of -12.0%.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Affirm's P/B ratio is 3.62 -- in other words, the market value of the company exceeds its book value by a factor of more than 3, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.76 as of the second quarter of 2024.
Affirm is likely overvalued at today's prices because it has a negative P/E ratio., an average P/B ratio, and negative cash flows with a downwards trend. The stock has poor growth indicators because of its with a negative growth trend, and no PEG ratio. We hope this preliminary analysis will encourage you to do your own research into AFRM's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
