Standing out among the Street's worst performers today is Affirm, a diversified financial company whose shares slumped -18.7% to a price of $38.83, 46.48% below its average analyst target price of $72.55.
The average analyst rating for the stock is buy. AFRM underperformed the S&P 500 index by -15.0% during today's afternoon session, but outpaced it by 38.5% over the last year with a return of 48.7%.
Affirm Holdings, Inc. operates payment network 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 release its trailing 12 month P/E ratio since its earnings per share of $-0.62 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for AFRM of -62.6. Based on the company's positive earnings guidance of $0.47, the stock has a forward P/E ratio of 48.9. As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 20.04, and the S&P 500 has an average of 29.3. 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.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Affirm's P/B ratio is 4.4 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.86 as of the third 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 No published cashflows with an unknown trend. The stock has mixed growth prospects because of its strong net margins with a positive growth rate, and a negative 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.
