Is it time to sell your Affirm stock?

Affirm is susceptible to a downturn because it is a buy-now-pay-later lender

According to Terry Tanaka, investors are becoming disinterested.

A significant amount of Affirm's (NYSE: AFRM) revenue comes from buy-now-pay-later (BNPL) payments, in which consumers are given the option to purchase a product up front and repay the cost (plus interest) over a longer time frame. Supporters claim that BNPL makes it possible for consumers to purchase goods or services that they otherwise couldn't afford, but detractors claim that the basic business model is essentially the same as traditional consumer credit, with high interest rates.

The recent proposal by Donald Trump to enact legislation capping credit card interest rates at 10 percent, however, has alarmed investors. The stocks of some of the biggest names in finance have declined. Furthermore, although a cap on interest rates is unlikely to become law, the proposal might draw attention to some of the more contentious aspects of the personal finance industry, which would be bad news for companies whose business models are already questionable.

From a technical standpoint, Trump's proposed ban would not directly impact the BNPL industry; in fact, if it becomes more difficult to borrow with traditional credit cards, it may even help it in the short term. But as Sahm Adrangi of Kerrisdale Capital notes, any broader consumer credit regulation or legislation would unavoidably involve the BNPL industry. Affirm, which has an average interest rate of more than thirty percent, might suffer greatly from that.

Why Affirm is in danger.

Even in the unlikely event that this doesn't occur, Affirms' lending practices are aggressive in comparison to those of its rivals, involving high levels of leverage, a greater dependence on high-risk customers, and longer loan terms. However, the majority of BNPL businesses get about half of their income from charging vendors for their services.

Just 25% of Affirm's revenue comes from this source, which means it is far more reliant on interest payments from customers. The company is therefore at risk if the slowing US economy causes even a slight increase in consumer loan default rates or if its presumptions regarding the creditworthiness of its users turn out to be overly optimistic.

Affirm's valuation, which has the shares trading at 152 times trailing earnings and 6.8 times sales, assumes that both revenues and profits will continue to grow strongly, so even a slowdown in the BNPL industry's rate of growth could be problematic. Even though it is anticipated that this multiple will decrease in the years that follow, the stock is still selling for 44 times projected 2027 earnings.

The depreciation of Affirms' shares over the past six months shows that investors are losing interest, despite the fact that the company's share price has nearly doubled over the past two years. Right now, their 50-day moving average is below their current trading level. For this reason, I would advise shorting it at the current price of £72 at 25 per £1. That would give you a 975 total downside, so I would set the stop-loss at £111.