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Affirm (AFRM) Pre-Q4 Earnings: Go All in or Play it Cool?

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Affirm Holdings, Inc. (AFRM - Free Report) is set to report its fourth-quarter fiscal 2024 results on Aug 28, after the closing bell.

The Zacks Consensus Estimate for fiscal fourth-quarter earnings is currently pegged at a loss of 45 cents per share, implying an improvement of 34.8% from the year-ago reported number. The estimate remained stable over the past week. The Zacks Consensus Estimate for fiscal fourth-quarter revenues is currently pegged at $599.5 million, suggesting a 34.5% rise from the year-ago actuals.

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AFRM beat the consensus estimate for earnings in two of the trailing four quarters and missed twice, with the average surprise being negative 22.9%, as you can see below.

Affirm Holdings, Inc. Price and EPS Surprise

Affirm Holdings, Inc. Price and EPS Surprise

Affirm Holdings, Inc. price-eps-surprise | Affirm Holdings, Inc. Quote

Affirm’s Q4 Earnings Whispers

Our proven model predicts a likely earnings beat for Affirm this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. That is precisely the case here, as you will see below.

Earnings ESP: The company has an Earnings ESP of +19.64%. This is because the Most Accurate Estimate currently stands at a loss of 36 cents per share, narrower than the Zacks Consensus Estimate of a loss of 45 cents.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Affirm currently carries a Zacks Rank #3.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Now, let’s see how things have shaped up before the fiscal fourth-quarter earnings announcement.

Q4 Factors to Note for AFRM

Travel and entertainment-related spending are expected to have been somewhat resilient in the quarter under review. This, in turn, is likely to have augmented the strength of active merchants and consumers. The Zacks Consensus Estimate for active consumers indicates 13.8% year-over-year growth.

The Zacks Consensus Estimate for merchant network revenues is pegged at nearly $167 million, indicating a jump of 17.8% from a year ago. Also, the consensus mark for servicing income indicates a 9.4% year-over-year increase to $25.4 million. The company expects the weighted average shares outstanding to be 316 million in the to-be-reported quarter.

The sales figures from the virtual card networks are anticipated to have risen. The Zacks Consensus Estimate for virtual card network revenues is pegged at $37.5 million, indicating a 10.3% year-over-year rise. Affirm anticipates fourth-quarter fiscal 2024 GMV to be $6.75-$6.95 billion, signaling a jump from $5.5 billion a year ago.

The consensus mark for interest income in the fourth quarter of fiscal 2024 is pegged at $325.7 million, indicating a 51.6% jump from the previous-year quarter, primarily due to its pricing initiatives and the high interest rate environment. The Zacks Consensus Estimate for gain on sales of loans suggests 32.6% year-over-year growth to $42.9 million. It expects adjusted operating margin to be within 15-17%.

The above-mentioned factors are expected to have positioned the company for year-over-year growth in the fourth-quarter fiscal 2024, boosting the chances for an earnings beat. However, the positives are likely to have been partially offset by higher operating costs.

The company expects transaction costs to be within $335-$345 million, significantly higher than the year-ago level of $264 million. Higher processing, servicing and funding costs are likely to have increased expenses. This is also likely to have boosted operating costs in the quarter under review, affecting the bottom line. Also, increased provision for credit losses, as a result of growing rainy day funds, are anticipated to have affected profits.

AFRM’s Price Performance & Valuation

Affirm's stock has lost 39.4% in the year-to-date period compared with the industry’s fall of 8.1%. Also, the stock underperformed the S&P 500 Index, which grew 17.9% during the same period.

YTD Price Performance

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Now, let’s look at the value Affirm offers investors at current levels.

The company’s valuation looks somewhat stretched compared with the industry average. Currently, AFRM is trading at 3.21X forward 12 months sales, above the industry’s average of 1.20X.

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Image Source: Zacks Investment Research

In comparison, a company from the broader Business Services space, Mastercard Incorporated (MA - Free Report) , is even less attractively valued, trading at 14.38X forward 12 months earnings. Global Payments Inc. (GPN - Free Report) , on the other hand, is trading at 2.88X, offering a better value at the moment.

Investment Thesis: Stay Put

Affirm faces rising costs, particularly in technology investments and funding, which is impacting profitability. Funding costs doubled in the first nine months of fiscal 2024. Additionally, rapid growth in provisions for credit losses reflects concerns over potential loan defaults. Affirm operates in a competitive industry, facing pressure to innovate amid low entry barriers. These factors could limit its short-term stock performance. However, Affirm’s strong merchant network, growing buy now, pay later (BNPL) market, and strategic partnerships with companies like Walmart and Liberty Travel position it well for continued market presence and long-term growth. Investors should closely monitor these factors.

What Should Investors Do Now?

Affirm remains a strong candidate for a "Hold" position. Given the potential for continued growth in the BNPL business and its expanding network of retail partners, investors who already own the stock may want to hold it for now. Its growing active consumer numbers, GMV figures and pricing initiativesare expected to improve the fiscal fourth-quarter bottom line. However, due to its rising costs, premium valuation and still not reaching sustained profit-maker status, new investors may want to monitor the upcoming earnings results closely and wait for a more favorable entry point.

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