Diversified Financial company Affirm is taking Wall Street by surprise today, falling to $74.94 and marking a -3.2% change compared to the S&P 500, which moved 0.0%. AFRM is -21.22% below its average analyst target price of $95.12, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Affirm shares have outstripped the S&P 500 by 80.0%, with a price change of 96.7%.
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's trailing 12 month P/E ratio is 499.6, based on its trailing EPS of $0.15. The company has a forward P/E ratio of 23.1 according to its forward EPS of $0.47 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 15.92, 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.
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 $290.84 Million 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 $-69572500.0 and they've been growing at an average rate of 39.2%.
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 7.94 -- in other words, the market value of the company exceeds its book value by a factor of more than 7, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.78 as of the third quarter of 2024.
Affirm is likely overvalued at today's prices because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and negative cash flows with an upwards trend. The stock has mixed growth prospects because of its weak operating margins with a stable trend, and an inflated 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.
