Affirm shares rise after Wells Fargo upgrades rating to "Overweight"

Investing.com -- Shares in Affirm (NASDAQ:AFRM ) were higher in premarket US trading on Friday after analysts at Wells Fargo raised their outlook for the financial technology group.

In a note to clients upgrading their rating for the stock to "Overweight" from "Equal Weight", the analysts argued that Affirm has "clearly demonstrated its right to win incremental ecommerce checkout share for years to come."

The company, which is known for offering buy-now-pay-later (BNPL) services, currently has a market capitalization of roughly $13.07 billion.

After soaring in 2023, the stock has slipped by just under 10% so far this year. However, it has been trending higher in recent months thanks to predictions that the Federal Reserve is about to embark on an expected cycle of policy easing.

In August, Affirm delivered both better-than-anticipated quarterly results and estimated that it would turn a profit by the fourth quarter of next year, sooner than Wall Street forecasts.

The Wells Fargo analysts subsequently said that, with unadjusted profitability "on the horizon," the case for Affirm's valuation "has finally become palatable."

Founded in 2012 by PayPal (NASDAQ:PYPL ) co-founder Max Levchin, Affirm competes with firms like Klarna and Block's Afterpay to provide BNPL services, which allow shoppers to divide their purchases into several installments over generally a period of three months to a year. Affirm and its peers then make money off of interest payments and fees charged to merchants.

Affirm was boosted in particular during the COVID-19 pandemic, when customers took advantage of stimulus checks and low interest rates to purchase pricier items like electronics or clothes. This uptick was tempered by the Fed aggressively lifting rates to corral sky-high inflation, which made it more expensive for Affirm to borrow the money needed to fund installment loans.

The Fed has since begun to ratchet down borrowing costs, most recently rolling out a jumbo 50-basis point reduction at its latest meeting in September. Traders are also pricing in further cuts this year and into 2025.

"As rates ease, [Affirm] will benefit from lower funding costs, which, will create an opportunity to address a wider credit spectrum, and drive higher growth," the Wells Fargo analysts said.

Source: Investing.com