The past twenty-four hours have been a wild ride for Affirm (AFRM 46.55, -12.13, -20.7%), a provider of buy now, pay later services that issued a disappointing 2Q22 report yesterday afternoon. In anticipation of strong results, shares were in rally mode throughout the day. That rally kicked into high gear in the afternoon when some of the company’s results were mistakenly leaked on Twitter (TWTR), showing that GMV and revenue for the quarter surged by 218% and 77%, respectively. At that point, there was little doubt that the remainder of the report would be strong, especially since AFRM recently locked up an agreement with Amazon (AMZN).
That assumption proved to be wrong. Shortly before the close, investors had the rug pulled out from under them when AFRM’s full report was released. Almost immediately, the stock tanked, as a few glaring blemishes were revealed, including:
The company’s guidance was disappointing on multiple fronts. For Q3, its revenue outlook of $325-335 mln was merely in line with expectations, and its GMV forecast calls for a 19% sequential drop. Due to seasonality, a drop-off in GMV is expected, but this projected decline is substantial. For a reference point, GMV fell by 8% on a sequential basis in 1Q21.
AFRM only raised its FY22 revenue guidance by $60-65 mln to $1.29-1.31 bln, which is pretty weak considering that it exceeded Q2 estimates by $28 mln. In essence, the company raised its 2H22 revenue guidance by a paltry $35 mln. For many companies, any bump to revenue guidance would be considered a win, but expectations are much higher for AFRM given its landmark partnership with AMZN.
Compounding the problem, AFRM sees adjusted operating margin sinking to (21)-(19)% in Q3 and to (14)-(12)% for FY22. This forecast represents a major reversal from FY21’s adjusted operating margin of 1.6%. During the earnings conference call, CFO Michael Linford linked the margin guidance to increasing investments to grow the business.
On the topic of profitability, AFRM’s GAAP net loss of $(0.57) missed expectations as total operating expenses soared by 141% yr/yr. The company doubled its headcount and also ramped up marketing investments around the holiday season.
Rising interest rates are another concern, particularly regarding AFRM’s split-pay arrangement with Shopify (SHOP), which is expected to comprise 15-20% of GMV in FY22. Specifically, the problem resides in AFRM’s revenue less transaction costs metric.
Last night, Linford explained, “… taking on a Split Pay product with 5% to 5.5% merchant fees, you’re not going to be making 4 points of margin. And so you do expect a little bit of compression on a percentage of GMV basis on the Split Pay business…”
This headwind does seem manageable, though: Linford estimates that a 100-bps increase above the increase implied by the current yield curve would only result in a 10-20 bps impact to revenue less transaction cost as a percentage of GMV.
The bottom line is that an expensive stock like AFRM, with a mid-teens forward P/S prior to this crash, is very susceptible to a sell-off if the growth projection weakens – especially in this current environment.