Long-term investing is often about ignoring what your gut tells you about a stock’s price or immediate value and just trusting the story. Some stories are just so compelling that quite rapid, massive growth looks more likely than not and, in that case, you have a choice: You can ignore your chart, hold your nose and buy, or you can devise a strategy that makes sense given current valuation. I prefer the latter and that is what I am doing in the case of Affirm (AFRM, a fintech company based in San Francisco.
Actually, ignoring the chart in this case isn’t that hard because, as you can see below, there isn’t much of a chart. Affirm had their IPO last month; the stock began trading on the Nasdaq three and a half weeks ago. What the chart doesn’t tell you in this case is that the initial offering price in that IPO was $49, meaning that AFRM closed yesterday having effectively gained around 150% in under a month. Normally, given that initial offering prices are carefully calculated by highly skilled investment bankers to represent the maximum possible value of the shares on offer, that would be a warning sign.
But, as I say so often these days, "normally" doesn’t apply right now.
Affirm is a company that offers installment payment plans at the point of sale for online purchases. They are basically the modern equivalent of a store cart without the retailer’s branding. The numbers show that offering Affirm increases a retailer’s cart conversions, average order value (AOV, and repeat customer numbers, so it is not surprising that they have been successful, attracting online sellers as big as Walmart.com (WMT.
That is why their last sales data showed revenue growth of over 97%. Obviously, at some point, that will slow down. Once you have signed up all the Walmarts of the world, doubling sales is not as easy as it was. Still, once you get to that point, even small percentage gains translate to a lot of money and, once the push for new business and personal clients slows and costs fall, that in turn translates to big profits.
Their story so far is one of remarkable success, but it isn’t hard to see why AFRM has done what it has since its launch. It is just about the perfect stock for the times.
For starters, there is the business model. People have had a ton of time on their hands and have been sitting at home, often surfing around looking at things they wish they could buy. Affirm translates those aspirations into purchases in many cases. However, their rapid uptake and growth isn’t just a "Covid thing." It is easy to forget, but even after the explosion in online sales as lockdowns occurred, e-commerce still only accounts for around 15% of U.S. consumer sales. The upshot? There is a lot of growth left for companies on the right side of that trend, such as for a company like Affirm.
Then there is the state of the market. Little things like profits and valuation are just so passé, so 2015. A good, easy to understand story can propel a stock higher, and buyers are showing a lot of patience when dealing with potential. There is always a risk that you will hit the top on a purchase like this, but that risk is less now than it has been before in the stock market. If anything, the greater risk is that you will miss out as the story gains traction and the stock continues on upwards.
However, what is different here is that the story can quickly translate to big profits; you aren’t looking at a decade or so before Affirm starts making money. That is why buying makes sense, even after that 150% jump.
Still, as I said, I don’t want to just jump in here. I would rather use a modified trading tactic to allow for a pullback, but still buy in the event of a continued rise in the stock. I would set two trigger points, maybe $100 to the downside and $130 to the upside. If either of those were hit, it would trigger a short period of dollar cost averaging into the stock. So, if AFRM falls to $100, you buy, say 25% of your total investment and then repeat that weekly for three more weeks, and you do the same if it moves up to $130.
That will allow for both fears, that there is a pullback after such a strong run, or that you may miss out if you don’t get on board soon. Most of all though, it will allow you to invest in a stock that is perfect for the times, both in terms of its story and the nature of the stock and to benefit from the company’s continued strong growth.