• Affirm (AFRM) stock is down by almost 86% from its 52-week high.
• Short-sellers have a 10.74% short float against the stock. Yet, active merchants, active customers and transaction volumes are all higher in the last quarter.
• Hold AFRM stock until its next quarterly results to see what to do next.

On May 9, Affirm Holdings (NASDAQ:AFRM) reported third-quarter results. The provider of the catchy buy now, pay later (BNPL) financing service issued a strong outlook. This sets the stage for a sustainable uptrend until its next earnings report in August. AFRM stock might outperform the fintech sector between now and August 9. The company has a positive profitability run rate through July 1, 2023.

Shareholders should expect Affirm to build upon its active merchant, active customer, and total transaction growth it reported in the last quarter. In addition, the company benefits from funding cost efficiencies and lower losses from loan purchase commitments.

Strong Business Momentum Will Drive AFRM Stock

Affirm reported a gross merchandise volume of $3.9 billion, up by 73% year-on-year (YOY). Active merchants soared from 12,000 to 207,000. This is due to merchants that adopted Shop Pay Installments on Shopify’s (NYSE:SHOP) platform. Active customers grew 137% to 12.7 million. Most importantly, total transactions increased by 162% (YOY) to 10.5 million.

Affirm owes its business momentum to building its network. It is continuously balancing the growth of the consumer side with the merchant side. Affirm needs to keep launching direct-to-consumer payment products as that happens. By capturing more transactions, the company will sustain its revenue growth projections.

Transaction Growth Despite Slowdown

Stock markets are bracing for a recession caused by the Federal Reserve increasing interest rates. Fortunately, Affirm expects a gross merchandise volume (GMV) of up to $4.05 billion in the fourth quarter and $15.14 billion for the fiscal year. Its adjusted operating margin is in the range of -11% to -15% for the fourth quarter. Shareholders will know the exact figure when Affirm posts its earnings result on August 9.

The company may issue a break-even operating margin. This will depend on its customers. For example, customers may prefer to avoid going through multiple websites and channels when they shop. They will use Affirm’s active checkout to complete the purchase.

Cost Controls

Affirm needs to stay ahead of the competition. It needs to keep hiring engineers to strengthen its economic edge. If it fails to innovate, competitors will enter the space and beat Affirm on pricing.

Investors should expect staff costs would pressure operating profits in the near term. Conversely, Affirm has room to adjust its merchant fees. The rate would depend on the pressure it faces from the competition.

At the macroeconomic level, interest rates will pressure Affirm’s funding side of the business. Fortunately, it has several funding channels. It staggered the maturity dates from its funding. This will minimize the impact of higher interest rates. Management will concentrate its efforts on realizing scale-driven benefits from past business developments.

Is AFRM Stock a Buy, Hold, or Sell Today?

Affirm is a hold. The stock is down by 85.95% from its 52-week high. Shares rallied after the earnings report, possibly due to a short-squeeze. The short float is 10.74%.

Once the buying pressure ends, the stock could settle at a lower price. When that happens, consider buying the stock at better prices.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.