This buy now, pay later stock is looking to make a comeback.

Affirm (AFRM) stock has been on a tear this week, rising some 40% over the last couple of days alone since the fintech reported its fiscal fourth quarter earnings Wednesday.

The buy now, pay later company, which provides consumers with installment loans at the point of purchase, soared 32% on Thursday, post-earnings, and it climbed another 7% on Friday, as the rally continued.

It has been the best stretch this year for Affirm stock, which is down about 10% year-to-date. Once a fintech darling in 2021, Affirm has fallen precipitously from its high of $165 per share in late 2021. Is this week’s rally a blip or a sign of some positive momentum?

Affirm hit hard by high interest rates

Few stocks have been hit harder by rising interest rates and inflation than Affirm — one of the leading buy now, pay later, or BNPL, companies.

As a young, growing, but unprofitable company, higher rates made the cost of borrowing to invest in the company more expensive. But also, Affirm is not a bank, so it must use third party banks for its installment loans, and high interest rates make those loans more costly to obtain, raising its funding costs. Further, inflation and the higher interest rates caused consumers to spend less, which also hurt Affirm, as it makes money the more often its service is used.

It all caused the stock the stock price to go from a high of $165 in October of 2021 to a low of just under $9 per share in May of 2023.

As higher rates have hurt Affirm, the company should benefit when rates start to go down in the second half of 2024 and beyond.

Q4 earnings crush estimates

Affirm is already starting to see improvements, as the firm had a strong fiscal fourth quarter, ended June 30. The firm generated revenue of $659 million, up 48% year over year, soundly beating estimates of $604 million. Revenue as a share of gross merchandise value (GMV), the total value of goods sold on its platform, climbed to 9.1%, from 8.1% the same quarter a year ago.

The number of transactions on the Affirm network surged 42% year over year to 24.7 million and 15% over fiscal Q3. Further, transactions per active consumer continued to increase, reaching 4.9, with consumers transacting frequently making up approximately 40% of all Affirm transactions in Q4.

In addition, interest income grew 57% year over year, and that is due in large part to pricing initiatives put in place last year. To offset the higher funding costs it pays, Affirm increased its interest rate for loans on the platform from 30% to 36%. This allowed Affirm to approve millions more consumers during an economically stressful period.

Also, the gain on sales of loans grew 116% as Affirm sold more loans than in prior periods, driven by better funding market conditions and higher average revenue per dollar of GMV due to the pricing initiatives.

Overall, it helped Affirm to move closer to profitability, as it had a net loss of $45 million in the quarter, or 14 cents per share, down from a net loss of $206 million in the same quarter a year ago. The results were far better than the 48 cents per share loss that analysts expected.

Moving toward profitability

In the letter to shareholders, Affirm CEO Max Levchin said the company plans to be profitable on a GAAP basis one year from now, in the fiscal fourth quarter of the coming fiscal year. And the plan is to maintain profitability thereafter.

In the fiscal first quarter of 2025, the company anticipates GMV of $7.1 billion to $7.4 billion, which would be up at the midpoint from $7.2 billion last quarter. Revenue is targeted at $640 million to $670 million, compared to $659 million last quarter.

For the full fiscal year, Affirm expects $33.5 billion in GMV and it anticipates revenue as a percentage of GMV to be 10 basis points higher than it was in fiscal 2024.

Affirm got a few modest price target upgrades after earnings, but its price target is still just $40, which is a few dollars per share below where it currently stands.

There is a lot to like about the direction Affirm is headed, and lower interest rates will definitely help it grow. However, after such a big runup the past few days, this might not be the ideal time to buy. While better days are ahead for Affirm stock, its probably best to monitor its path to profitability the next few quarters.

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