Do you ever wonder how disconnected a stock’s valuation can possibly get from the fundamentals of the underlying business?
That question is hard to answer with traditional valuation tools and ratios. But, answering that question is exactly what our reverse discounted cash flow (DCF) model allows us to do for the thousands of stocks we cover.
During a recent Earnings Recap session, we reviewed Affirm (AFRM: $62/share) and did a deep dive into its valuation. The results were shocking. Rarely will you see a stock with a valuation so disconnected from the fundamentals of the business. Let’s get specific
Expectations Investing Analysis on AFRM
As we do for all of our Reverse DCF Case Studies, we use our valuation models to quantify the future performance of the company required to justify its current stock price.
Specifically, our model shows that to justify ~$62/share Affirm would have to:
- grow revenue at 26.3% compounded annually for 8 years while also
- improving its return on invested capital (ROIC) from -8% to 122% and
- improving its net operating profit after tax (NOPAT) from $0.3 billion to $3.6 billion.
Let’s put some context around those expectations.
Benchmarking Expectations for AFRM
First, growing revenue at 26.3% CAGR for 8 years means Affirm’s revenue would be $15 billion in 2033. While also growing revenue at a rapid pace, the stock price implies Affirm will also increase its ROIC and NOPAT to very high levels. See Figure 1 for details.
Figure 1: Ranking Affirm’s Expected Cash Flows to the S&P 500
Sources: New Constructs, LLC and company filings.
As we discuss in our latest reverse DCF case study video, we think there are several reasons why the expectations embedded in Affirm’s current stock price are too high.
Competitive Realities
Large revenue growth, like what’s embedded in Affirm’s stock price, implies significant market share gains. We note that market share gains are typically won with lower prices, which are not possible with a company that must also increase its ROIC and NOPAT to very high levels.
In other words, Affirm’s stock price is implying a doubly-incredible future where the company enjoys huge revenue growth and NOPAT and ROIC improvement as well.
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Sources: New Constructs, LLC and company filings.
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More Expectations Investing Case Studies
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If you enjoyed seeing what we show for Affirm’s real cash flows as well as the future revenue expectations baked into the stock price, you’ll love our other reverse DCF case studies.
If you’re interested in seeing more examples of how our DCF model works, I recommend checking out the Reverse DCF Case Studies here in our Online Community. To join our Online Community, complete this form.
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How To Avoid the Landmines
Whenever stocks get super expensive, it is only a matter of time before they fall back to earth as the law of competition inevitably proves the expectations for future cash flows to be overly optimistic.
We have multiple Model Portfolios, including our Zombie Stocks list, to warn investors of stocks to avoid and alert them to stocks that get our Attractive rating. We also provide best-in-class ratings for stocks, ETFs, and mutual funds.
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This article was originally published on February 27, 2025.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, sector, style, or theme.
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