Affirm stock rating cut by Morgan Stanley; Price target lowered

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By Liz Moyer -- Morgan Stanley downgraded shares of Affirm Holdings Inc (NASDAQ:AFRM) and cut its price target, saying the buy now pay later fintech firm’s product ambitions are too great.

“Affirm’s product ambitions are too large given narrow incremental benefits, slow consumer behavior change, development cost limitations, pricing missteps, and potential for increasing customer acquisition friction, all with a small time window for rapid customer base growth,” the research firm said in a note on Friday.

Morgan Stanley cut its rating to equal weight from overweight, and lowered its price target to $15 from $46.

Affirm shares fell 6.4% on Friday. They are up 30% so far this year. The new price target implies 21% upside from the current level.

Affirm reported disappointing earnings this week and said it would cut 19% of its staff after growing too fast and then not reacting quickly enough to position its business for the consumer spending downturn caused by rapidly rising interest rates.

Buy now pay later became the latest hot trend in the payments industry in the last few years, offering consumers an alternative to a credit card at the point of sale. A consumer could use BNPL to spread payments evenly over a few weeks or months. But Affirm’s focus on BNPL is limiting, the analysts said.

“BNPL can be a great way to give younger consumers and those with limited credit history access to purchasing credit,” Morgan Stanley said in the research note. “However, by limiting its offering to BNPL and developing products that have substantially different features (e.g. Debit+) than what has been broadly adopted by the market (i.e. revolving credit), the challenges to customer education and adoption rise.”

In addition, now Affirm faces a more challenging economic scene, when consumers are reining in their spending on certain items and feeling pressured by inflation. “We think that Affirm’s broad ambitions self-limit its potential, compounded near-term by the adverse drag of a poor credit cycle and the need to build in new pricing ranges and interest rate ceilings,” Morgan Stanley wrote.

The analysts add that they don’t believe the BNPL idea isn’t viable. It might just be more niche. “We believe that Affirm’s differentiated product offering, customer engagement, and merchant relationships will make for a sustainable and ultimately reasonably profitable one, but one that is likely to be limited to a niche customer base (rather than a mass-market one) with normal financial services returns/profitability.”

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