Overvaluation And Tightening Regulation Will Hurt BNPL Prospects

Key Takeaways

• Intensifying competition, economic pressures, and consumer caution threaten to limit revenue growth and erode transaction-based margins in the core installment lending business.
  
• Regulatory scrutiny and reliance on key merchant partners present ongoing risks to profitability, expansion, and overall business stability.
  
• Strong user growth, successful new product adoption, and expanding international partnerships position the company for sustained revenue momentum and long-term profitability.

Catalysts

Operates payment network in the United States, Canada, and internationally.

• As consumers increasingly grow wary of taking on new debt-especially in the face of rising borrowing costs and heightened public awareness about the risks of point-of-sale financing-the addressable market for Affirm's core Buy Now Pay Later offering may contract, ultimately restraining top-line revenue growth in future years.
  
• The company faces intensifying regulatory scrutiny in the U.S. and internationally, with evolving frameworks around consumer credit, data privacy, and lending standards. This could result in costly compliance burdens and potentially tighter restrictions on customer onboarding, suppressing net margins and curtailing expansion into new markets.
  
• The rapid proliferation of alternative payment tools, from enhanced traditional credit cards with flexible repayment to BNPL offerings from legacy banks and Big Tech, threatens to commoditize installment lending and place persistent downward pressure on Affirm's take rates and transaction-based revenue.
  
• Persistent and potentially worsening credit losses during economic downturns-especially among subprime or over-extended borrowers-may require significant increases in loan loss provisions or tightening of underwriting. This would directly depress net income and slow gross merchandise volume growth, especially if macroeconomic shocks occur.
  
• Affirm's heavy reliance on a handful of large merchant and platform partners exposes it to concentration risk. The loss or unfavorable renegotiation of a key relationship-such as with Amazon, Shopify, or another enterprise merchant-would create abrupt and substantial volatility in transaction volume and revenue generation.

Affirm Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Affirm Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Affirm Holdings's revenue will grow by 22.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.6% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach $310.2 million (and earnings per share of $0.85) by about August 2028, up from $52.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 94.6x on those 2028 earnings, down from 552.0x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 3.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

Affirm Holdings Future Earnings Per Share Growth

Risks

• Affirm highlighted record quarterly results with accelerating growth, strong originations, and a new high in repeat usage, indicating robust revenue momentum and positive customer engagement trends that, if sustained, could support higher earnings and share price growth.
  
• Adoption of 0% APR loans is driving significant new user acquisition and these users not only repeat but also convert to more profitable interest-bearing loans, suggesting long-term improvement in customer lifetime value and supporting gross margins and net income.
  
• The Affirm Card is rapidly expanding in both usage and attach rates, with substantial investments planned and operational success already demonstrated, which could diversify the business, boost transaction volumes, and increase revenue streams.
  
• Affirm's advancements in AI, particularly its AdaptAI and Adaptive Checkout, are already delivering a 5% uplift in gross merchandise volume for select merchants, pointing to further gains in merchant efficiency, consumer conversion, and future revenue growth as adoption spreads.
  
• Expansion into international markets, especially through partnerships like Shopify in the U.K. and with plans for broader European rollouts, opens up new growth avenues and a larger total addressable market, increasing the potential for long-term revenue growth and stronger overall financial performance.

Valuation

• The assumed bearish price target for Affirm Holdings is $64.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Affirm Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $64.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.0 billion, earnings will come to $310.2 million, and it would be trading on a PE ratio of 94.6x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $88.46, the bearish analyst price target of $64.0 is 38.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.