As one of the top financial technology (fintech) firms specializing in buy now, pay later (BNPL) services, Affirm (NASDAQ:AFRM) offers significant speculative appeal. With BNPL apps, consumers are able to finance purchases through installment payments instead of traditional credit cards. Affirm in particular partners with retailing giants such as Amazon (NASDAQ:AMZN), Shopify (NYSE:SHOP) and Walmart (NYSE:WMT), enhancing its appeal and driving value in AFRM stock.
Fundamentally, Affirm provides a clear alternative to credit cards. As such, the company resonates with younger consumers along with households with thin credit histories. The size of both population segments suggests that Affirm enjoys a relatively large total addressable market. For example, in 2022, about 28 million Americans never had credit and didn’t carry a credit file. Further, another 21 million had credit files but lacked adequate information to be scored.
Of course, it goes without saying that Affirm’s business model is highly dependent on a strong consumer economy — and that’s the rub right now.
As Money Morning’s Chris Johnson implied, earlier this year, all roads appear to be heading toward inflation. Consumers have been burdened with the new paradigm of higher prices post-Covid. Add in the impact of tariffs and a radical shift in economic policy under President Trump and the problem of inflation will almost certainly worsen.
Many investors and experts are turning to safe havens like gold to protect their wealth in real terms. What’s not going on, however, is a willingness to spend. Indeed, the latest consumer sentiment report saw numbers that came in much lower than anticipated.
By logical deduction, people with thin credit profiles may be the most impacted by the current pressure points in the economy. That’s not good news for AFRM stock, thus warranting a cautious approach.
While AFRM stock has enjoyed an impressive performance over the past one-year period — gaining about 73% — there’s brewing evidence that circumstances are starting to weigh on investor sentiment. Last week, the security lost nearly 16% of value.
Moving forward, the biggest challenge for traders is that AFRM stock suffers from a negative bias. Using data since its January 2021 market debut, a position entered at the beginning of the week has as 51.16% chance of rising by the end of it. However, over an eight-week period, this baseline probability slips to 40.87%.
Conducting dynamic probability analysis — or accounting for the heightened volatility of last week — makes the matter worse. There have been 32 times when AFRM stock lost between 10% and 20% in a one-week period. In the subsequent week following this anchor event, the long odds fall to 46.88%. Over an eight-week period, the odds drop to 28.12%.
Unfortunately, traders have demonstrated reluctance to buy the dips in AFRM stock. This doesn’t guarantee that the equity will fall from here. However, amid troubling fundamental headwinds, it may be better for conservative investors to sit this one out for now.
Aggressive traders, on the other hand, could potentially extract value on the way down. Historically, the third week following strong volatility tends to see a high failure rate for the bulls, along with a median loss of 14.59%. It’s possible, then, for AFRM stock to fall to $55.12.
With that in mind, bold speculators may consider the 63/60 bear put spread for the options chain expiring March 14. In this transaction, the trader buys the $63 put ($305) and simultaneously sells the $60 put ($175). The proceeds from the short put partially offsets the debit paid of the long put, leading to a net debit paid of $130. Should AFRM reach or fall below $60 at expiration, the maximum reward is $170, or a payout of 130.77%.
