By James Rogers
Buy now pay later operator Affirm has been added to the list of ‘zombie’ stocks compiled by independent equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, warns there are plenty of challenges ahead for Affirm Holdings Inc. /zigman2/quotes/223715966/composite AFRM -7.96% .
“Affirm’s stock is at risk of declining to $0 per share as both the company and broader payments industry face significant headwinds,” wrote New Constructs CEO David Trainer, in a statement. “The idea of ‘buy now, pay later’ may have sounded plausible during a low interest rate and easy money environment, but as the Federal Reserve raises interest rates and recession risks loom, we believe investors should avoid Affirm’s stock.”
Shares of Affirm have fallen 80.3% this year, outpacing the S&P 500 Index’s /zigman2/quotes/210599714/realtime SPX -1.44% decline of 21.2%. The payments company, along with other Fintech stocks, also took a hit recently after the August consumer-price index showed a surprise monthly increase .
New Constructs put Affirm in its ‘danger zone’ in October 2021, and cites the company’s cash burn as an issue. “Since fiscal 2020 (fiscal year ends in June), Affirm has burned through $3.4 billion in FCF excluding acquisitions,” wrote Trainer. “The cash drain at Affirm isn’t slowing as the company burned through $1.5 billion in FCF in fiscal 2022. “
“Even with $1.3 billion in cash and cash equivalents at the end of fiscal 2022, Affirm’s cash balance can only sustain its 2022 cash burn rate for another 10 months or until April 2023,” Trainer added.
The company had almost $1.5 billion in cash and cash equivalents at the end of fiscal 2021.
“Raising additional capital to fund this cash-burning business would likely come at a high cost, especially as consumers come to grips with the pitfalls and harms of buy now pay later (BNPL) platforms,” wrote Trainer. “Affirm’s severe cash crisis, along with competitive challenges, puts the company’s stock at significant risk of declining to $0 per share.”
New Constructs also points to intensifying competition from the likes of Apple Inc. /zigman2/quotes/202934861/composite AAPL -2.54% , which entered the BNPL space earlier this year.
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“Affirm’s hyper growth is slowing, as competitors increase their offerings and giants such as Apple (AAPL) enter the BNPL market,” wrote Trainer. “Bulls could argue in the past that Affirm’s spending was necessary to grow market share, but as time passes, it’s clearer each day that there is no differentiation between all the BNPL businesses, except, maybe, who loses more money.”
At the end of June 2022 Affirm had around 14 million active customers, 235,000 active merchants, and a gross merchandise volume of $15.5 billion. The company’s stock rose before market open on Thursday after it announced that Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -3.03% will use its payment option for customers in Canada. The stock then pulled back, falling 6.7% during afternoon trading.
Other companies on New Constructs’ zombie stocks list include AMC Entertainment Holdings Inc. /zigman2/quotes/200235402/composite AMC -9.40% , GameStop Corp. /zigman2/quotes/203755179/composite GME -8.49% , Snap Inc. /zigman2/quotes/205087158/composite SNAP -6.73% , Rivian Automotive Inc. /zigman2/quotes/230726939/composite RIVN -5.55% , Robinhood Markets Inc. /zigman2/quotes/228268942/composite HOOD -2.90% , and Carvana Co. /zigman2/quotes/206651606/composite CVNA -5.49% .
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Of 19 analysts surveyed by FactSet, nine have an overweight or buy rating on Affirm, seven have a hold rating, and three have a sell rating.