Should You Sell Your Affirm Stock?

Why It Matters

Affirm’s financial fragility and regulatory risk could trigger a sharp price correction, impacting investors and the broader BNPL market.

Key Takeaways

• Affirm relies heavily on high‑interest loan revenue.
• BNPL sector faces potential regulatory scrutiny.
• Leverage and risky consumer base increase default risk.
• Valuation multiples remain extremely high despite slowdown.
• Stock price below 50‑day moving average, short‑sell suggestion.

Pulse Analysis

The buy‑now‑pay‑later (BNPL) market has surged in the past five years, offering consumers flexible financing while providing merchants with higher conversion rates. Yet the rapid expansion has attracted scrutiny from policymakers who argue that BNPL products resemble high‑cost credit. Recent political proposals to cap credit‑card interest rates have amplified concerns that regulators may broaden oversight to include all short‑term consumer loans, placing firms like Affirm in the crosshairs of potential new legislation.

Affirm distinguishes itself by leaning heavily on interest income rather than merchant fees, capturing roughly 75% of its revenue from borrowers paying rates that often exceed 30%. This model amplifies earnings when credit quality remains strong but also magnifies exposure to defaults when economic conditions weaken. The company’s balance sheet shows elevated leverage, and its loan portfolio skews toward higher‑risk consumers, factors that could exacerbate loss rates if unemployment rises or consumer spending contracts. Compared with rivals that diversify revenue streams, Affirm’s concentration on high‑interest loans makes it particularly vulnerable to both macroeconomic headwinds and any regulatory caps on permissible rates.

Investors have responded to these risks with a sharp correction in the stock price, which now sits below its 50‑day moving average despite a two‑year rally. Valuation metrics remain lofty—over 150 times trailing earnings and nearly 45 times projected 2027 earnings—suggesting that the market’s optimism may be overstated. Analysts are recommending short positions at current levels, citing the confluence of aggressive lending practices, regulatory uncertainty, and unsustainable multiples as catalysts for a potential downside move, a scenario that could reverberate across the broader BNPL sector.

Should you sell your Affirm stock?

By Dr Matthew Partridge

Published last week

Consumer credit company Affirm (NYSE: AFRM) makes a large proportion of its money through buy‑now‑pay‑later (BNPL) payments, whereby people are offered the chance to secure a product upfront and pay the cost back (with interest) over an extended period. Supporters argue that BNPL enables people to buy goods or services they wouldn’t otherwise be able to afford, but critics say the core business model barely differs from traditional consumer credit, with interest rates typically high.

Recently, investors have been rattled by Donald Trump’s call for a law to cap interest rates on credit cards at 10 %. Some of the biggest names in finance have seen their stocks fall. While a cap on interest rates is unlikely to become law, the proposal highlights controversial parts of the personal‑finance sector – bad news for firms whose business model is already dubious.

Technically, Trump’s proposed ban wouldn’t directly affect the BNPL industry, and might even boost it in the short run if it becomes harder to borrow using traditional credit cards. However, as Sahm Adrangi of Kerrisdale Capital points out, the BNPL sector would inevitably be caught up in any wider regulatory action or legislation on consumer credit. That could have a disastrous impact on Affirm, which charges an average interest rate in excess of 30 %.

Why Affirm is at risk

Even if this doesn’t happen, Affirm’s lending practices are aggressive compared with those of its competitors, with large levels of leverage, a greater reliance on high‑risk consumers and longer loan duration. While most BNPL companies make around half their revenue from charging vendors a fee for their services, Affirm makes only a quarter of its money this way, making it much more dependent on interest income from those purchasing the goods.

All this makes the company vulnerable if the slowing US economy leads to even a small uptick in the rates of default on loans to consumers, or if its assumptions about the credit‑worthiness of its users prove too optimistic.

Even a slowdown in the rate of growth of the BNPL industry could present difficulty: Affirm’s valuation assumes that both revenues and profits will continue to expand strongly, with the shares trading at 152 times trailing earnings and 6.8 times sales. Although this multiple is expected to decline in subsequent years, the stock still sells for 44 times expected 2027 earnings.

While Affirm’s share price has nearly doubled over the last two years, investors are losing their enthusiasm, as illustrated by the shares’ depreciation over the last six months. They are now trading below their 50‑day moving average. I would therefore suggest shorting it at the current price of $72 at £25 per $1. In that case, I would put the stop‑loss at $111, which would give you a total downside of £975.

This article was first published in MoneyWeek's magazine.