During the worst of the COVID-19 pandemic, most technology companies thrived, driven mainly by the switch to hybrid work structures and increased demand for digitization and automation. But rising Treasury yields and the possibility of monetary policy tightening sooner than expected could cause tech stocks to retreat in price in the near term. Furthermore, because tech stocks have become a mainstay in portfolios across Wall Street, there are concerns that they may be susceptible to violent market swings if investors try to sell all at once.
In addition, Democrats are seeking to cover their $3.5 trillion Build Back Better spending proposal by limiting the tax break that investors receive when investing in tech startups. If passed, the bill could curb the 100% capital gains exemption. Moreover, prolonged semiconductor chip and components shortages are creating production bottlenecks in several tech companies.
Given this dire backdrop, we think it might be reasonable to avoid fundamentally weak, and overvalued, tech stocks Affirm Holdings, Inc. (AFRM) and Farfetch Limited (FTCH).
Affirm Holdings, Inc. (AFRM)
AFRM in San Francisco is a digital and mobile-first commerce platform. The company’s offerings include point-of-sale payment solutions for its customers and merchant commerce solutions. The company went public in a traditional IPO process on January 13, 2021.
On September 29, AFRM partnered with secondary ticket marketplace provider TicketNetwork® to provide tickets for events with provisions for paying over time. However, if coronavirus cases continue to surge, restrictions may be imposed on live events that could make realizing gains from this partnership uncertain for AFRM.
In terms of forward EV/Sales, AFRM is currently trading at 32.43x, which is 708.9% higher than the 4.01x industry average. Its 30.61 forward Price/Sales multiple is 682.1% higher than the 3.91 industry average.
In its fourth fiscal quarter, ended June 30, AFRM’s total operating expenses increased 239% year-over-year to $386.47 million. Net income and net income per share declined 468.3% and 382.4%, respectively, year-over-year to negative $128.23 million and negative $0.48. Its adjusted operating income decreased 69.6% from the prior-year quarter to $14.21 million.
Although the $294.30 million consensus revenue estimate for the current quarter (ending December 2021) indicates a 44.2% year-over-year increase, analysts expect its EPS to be a negative $0.22 for the current quarter.
AFRM’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
AFRM has a Value grade of F, and a Stability, Sentiment, and Quality grade of D. In the 69-stock Technology – Services industry, it is ranked #64. This industry is rated D. Click here to see the additional POWR Ratings for AFRM (Growth and Momentum).
Farfetch Limited (FTCH)
London-based FTCH is an online marketplace for luxury fashion items in the United States and globally. The company operates through three segments: Digital Platform, Brand Platform, and In-Store. It runs the website Farfetch.com.
On September 16, the Schall Law Firm announced that it was investigating FTCH on behalf of investors for allegedly violating securities laws. The law firm has invited investors who purchased the company’s securities between March 22 and April 6 of this year to contact it.
FTCH’s 70.82 forward Price/Cash Flow multiple is 452.9% higher than the 12.81 industry average. In terms of forward EV/EBITDA, FTCH is currently trading at 670.29x, which is 6,448.1% higher than the 10.24 industry average.
For its second fiscal quarter, ended June 30, FTCH’s revenue increased 43.5% year-over-year to $523.31 million. However, its cost of revenue also increased 42.8% from the same period last year to $293.23 million. Its operating loss rose 7.2% from the prior-year quarter to $150.30 million, and its loss per share attributable to equity holders of the parent stood at $0.31 for the period.
The Street expects FTCH’s EPS to decrease 507.7% year-over-year to a negative $1.06 for the next year (fiscal 2022).
FTCH’s POWR Ratings reflect its poor prospects. The stock has an overall D rating, which translates to Sell in our POWR Rating system. FTCH has an F grade for Value, and a D for Stability and Quality. It is ranked #62 of 78 stocks in the F-rated Internet industry.
In addition to the POWR Rating grade we’ve stated above, one can see FTCH ratings for Growth, Momentum, and Sentiment here.
AFRM shares were trading at $148.21 per share on Friday afternoon, down $0.26 (-0.18%). Year-to-date, AFRM has gained 52.42%, versus a 20.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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