Morgan Stanley downgraded Affirm (AFRM) to Underweight from Equal-Weight, raising its price target on the stock to $20 from $15 per share.
The investment bank's analysts cited concerns about the company's valuation and potential customer quality deterioration. Morgan Stanley acknowledged the company's impressive share price growth trajectory but said the risk-reward is skewed to the downside.
Analysts noted that Affirm's valuation is stretched across a variety of metrics, with even aggressive assumptions only driving GAAP EPS to $1.00 by FY28. They also pointed to declining levels of 0% promotions and declining FICO scores on ABS deals as potential red flags.
In addition, analysts conducted a historical analysis of Capital One and found that Affirm has under-monetized the Millennial/Gen Z opportunity. They believe Capital One has been more successful in capturing this demographic.
"After +79% appreciation over the last month and +383% YTD, risk-reward appears skewed to the downside at current levels even with pending strength through a seasonally strong holiday period," analysts wrote. "[The] valuation seems difficult to justify across all metrics."