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The Ratings Game: Affirm stock rockets as Amazon BNPL deal may tell a bigger story

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Shares of Affirm Holdings Inc. are surging toward their best day on record Monday after a partnership arrangement with Amazon.com Inc. proved a big vote of confidence in the company’s business model.

Affirm
AFRM,
+46.61%

announced Friday that select Amazon
AMZN,
+2.66%

customers are getting access to Affirm’s installment-pay services, with plans for a larger rollout over the coming months. The partnership will allow Amazon shoppers to split the cost of purchases into chunks, and Affirm says that it won’t charge hidden fees or late fees on the service.

“Although many had thought Affirm was losing the competitive battle in the BNPL arena, it’s clear from this Amazon partnership, coupled with Shopify, that Affirm is back in the driver’s seat,” RBC Capital Markets analyst Daniel Perlin wrote in a note to clients.

Affirm’s stock, which went public on Jan. 13, shot up 43.3% in afternoon trading. The previous biggest one-day gain was 18.7% on Feb. 8.

The BNPL trend has been gaining steam in the U.S., and there has been no shortage of related developments in recent months. Affirm shares came under pressure in mid-July amid concerns about Apple Inc.’s reported plans to get into the BNPL game, then rose in early August after Apple was said to be working with Affirm on an installment option for the Canadian market. Rival Afterpay Ltd. is in the midst of being acquired by Square Inc. in a $29 billion combination.

The timing of the Amazon announcement “could not have been better,” wrote RBC’s Perlin, given that top Affirm customer Peloton Interactive Inc.
PTON,
-3.06%

recently issued a disappointing outlook, which may have contained negative read-throughs for Affirm.

“The combination of Shopify and Amazon as platform partners for Affirm, we believe, has quickly changed the conversation with investors, with the bear argument on AFRM being a financial services firm, and valued accordingly, quickly being overtaken by the sheer growth opportunity that these two partnerships afford,” he continued.

Perlin rates the shares at outperform and raised his price target to $124 from $87.

Barclays analyst Ramsey El-Assal called the arrangement a “game-changer” for Affirm, arguing that it not only offers opportunities for financial upside but also serves as a broader validation of Affirm’s business model.

“While details of the deal are sparse beyond what was provided in Affirm’s press release, we would assume Amazon’s process included an intensely competitive RFP [request for proposal], which Affirm likely did not win on price alone,” he wrote. “For example, we see Affirm’s competitive advantage being in part related to the company’s ability to underwrite longer-term, higher-AOV [average order value] loans vs. competitors, which we believe would be important to Amazon given the wide range of products sold on the site.”

Though there are a multitude of players in the BNPL arena, Affirm is known for its ability to conduct risk assessment on high-value purchases, and the company offers a mix of interest-free and simple-interest options.

As for the financial potential, El-Assal estimated that the arrangement could result in 33% upside to consensus estimates for Affirm’s 2023 fiscal year at the midpoint of his analysis. He has an overweight rating on the stock and raised his price target to $115 from $85.

While Truist analyst Andrew Jeffrey noted that there are still some unknowns about the Amazon deal, such as whether it’s exclusive, he agreed that the partnership sends a positive signal about Affirm’s standing in the market.

“Whereas BNPL has relatively low entry barriers, in our view, and can become quickly commoditized, recent enterprise wins at Shopify (exclusive) and now Amazon (exclusivity unknown) highlight Affirm’s competitive advantage,” he wrote, while maintaining a buy rating and lifting his price target to $120 from $82.

Mizuho analyst Dan Dolev indicated that there could be strong interest in a BNPL option on the Amazon platform, given that his recent survey of more than 200 Amazon shoppers found that nearly half of them were likely to use the offering. Only 18% of those surveyed were already Affirm customers, suggesting opportunity for the fintech company to grow its customer base.

“We believe the sheer headline in partnering with the #1 U.S. e-comm retailer could launch Affirm into higher orbit, making the fear of competition from Apple Pay earlier this summer seem like a long-forgotten bad dream,” he wrote.

Dolev has a buy rating on the stock and boosted his target price to $110 from $76.

Affirm shares are now up 59% over the past three months as the S&P 500
SPX,
+0.56%

has risen 8%.

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