Affirm stock is compressing: here’s why it may pop after earnings today

Affirm's stock has traded sideways over the past few weeks, but that may change later today when the company releases its financial results, offering fresh insight into the business. AFRM was recently trading at $76.45, still within the range it has held during this period. This article explores why the stock could be on the cusp of a major breakout once the report is out.

Affirm stock has formed a bullish pattern

The daily chart shows that the AFRM stock has rebounded in the past few months, moving from the year-to-date low of $42 to the current $76. Most recently, however, the stock has consolidated, forming a symmetrical triangle pattern whose two lines are about to converge. 

The stock has remained above the 50-day Exponential Moving Average (EMA), a sign that bulls remain in control for now. At the same time, it has slowly formed a multi-month inverted head-and-shoulders pattern, a common bullish reversal pattern in technical analysis. 

Therefore, the stock will likely have a strong bullish breakout, potentially to the key resistance level of $86.90, its highest point in July. If this happens, the stock may jump to the psychological level of $99.90, its highest level in August last year. On the flip side, a drop below the key support level of $69, its lowest level on July 29, will invalidate the bullish forecast.

AFRM stock chart | Source: TradingView

Affirm earnings to show robust revenue growth

Affirm, a leading player in the Buy Now, Pay Later (BNPL) space, is thriving even as the US economy remains under pressure. With inflation still elevated and unemployment at 4.2%, demand for credit continues to rise.

Other top companies in the industry published strong financial results. Klarna, GMV jumped by 18% from last year to $36 billion, while its revenue soared by 27% to $1.2 billion. Its guidance, however, was weaker than expected because of its Germany business. Sezzle, on the other hand, reported a 51% annual growth rate, with its GMV rising by 37%.

Yahoo Finance data shows that analysts expect Affirm’s revenue rose by 26.3% in the second quarter to $1.1 billion. For the year, analysts expect the results to be $4.2 billion, up by 30% YoY.

Most importantly, Affirm’s focus on profitability is paying off. Its earnings-per-share is expected to come in at 85 cents, up sharply from the 53 cents it made in the same period last year. For the year, the EPS is expected to jump from $1.75 to $3.25. 

Its strong revenue and profitability growth may help to justify its valuation, something that Morgan Stanley noted when it slashed its outlook to equal-weight. The company trades at a forward price-to-earnings ratio of 25, more than double the financial sector median of 25. It is also higher than the tech sector average of 22.

On the other hand, Oppenheimer and BMO Capital Markets boosted their targets to $100 and $86, pointing to the ongoing growth in the BNPL industry and falling default rates among customers. Truist, Bernstein, and Cantor Fitzgerald also boosted their targets for the company.