Diversified Financial company Affirm is standing out today, surging to $32.1 and marking a 8.7% change. In comparison the S&P 500 moved only 0.0%. AFRM is -14.08% below its average analyst target price of $37.36, which implies there is more upside for the stock. However, the average analayst rating for the stock is hold -- a more pessimistic outlook than you might expect. Over the last year, Affirm shares have outperformed the S&P 500 by 64.8%, with a price change of 88.4%.
Affirm Holdings, Inc. operates a platform for digital and mobile-first commerce in the United States, Canada, and internationally. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.
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 $-1.5 and $-2.22. We can see that AFRM has a forward P/E ratio of -21.4 and a trailing P/E ratio of -14.5.
As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 15.89, and the S&P 500 has an average of 27.65. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Affirm's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -0.16. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing AFRM's growth potential .
Affirm's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 12,181 | 120,775 | -108,594 | 56.3 |
| 2022 | -162,194 | 86,290 | -248,484 | -16.45 |
| 2021 | -193,130 | 20,252 | -213,382 | -593.65 |
| 2020 | -28,447 | 2,315 | -30,762 | 71.27 |
| 2019 | -87,649 | 19,406 | -107,055 |
- Average free cash flow: $-141655400.0
- Average free cash flown growth rate: -12.0 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for AFRM, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
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 indicates that the market value of the company exceeds its book value by a factor of 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.
With a negative P/E ratio., an average P/B ratio, and negative cash flows with a downwards trend, we can conclude that Affirm is probably overvalued at current prices. The stock presents poor growth indicators because of its with a negative growth trend, and no PEG ratio.
