Bank of America upgraded Affirm Holdings (NASDAQ:AFRM) to a Buy rating from Neutral in a note Tuesday, maintaining a $36 per share price target on the stock. The company cited prospects of GAAP profitability appearing closer than consensus expectations.
Affirm shares are up 5% premarket following the BofA comments.
The investment bank's analysts believe that Affirm's focus on profitability, coupled with favorable interest rate conditions, could drive share price outperformance.
According to BofA, Affirm's November 2023 investor forum detailed a medium-term profitability framework that seems achievable given the company's prudent expense management year-to-date.
"We forecast GAAP profitability to arrive in F26, faster than consensus," BofA stated, noting that other companies like Square and Toast saw significant share price increases when they provided more precise timelines to GAAP profits.
BofA also highlights that a lower interest rate environment would benefit Affirm's funding costs and gain on loan sales.
Additionally, Affirm's recent move to increase its merchants' APR cap on loans from 30% to 36% is expected to remain a tailwind for yields and GMV growth.
The upcoming earnings in late August is seen as a potential positive catalyst for the company.
BofA suggests Affirm could deliver upside in F4Q and provide solid guidance for F25, potentially communicating a more bullish message on profitability.
The analysts are also confident in Affirm's partnerships, including with Apple, Amazon, and Shopify, which should support F25/F26 forecasts.
Despite the positive outlook, BofA says the biggest risk to their call is the uncertain macroeconomic environment and potential lower discretionary spending among lower to middle-income consumers, which constitute a significant portion of Affirm's customer base.
Nevertheless, BofA views Affirm as a leader in the buy now, pay later (BNPL) sector, which is expected to capture a growing share of overall consumer spending.