It is hard to believe that this is the first time I have written about Affirm Holdings (NASDAQ:AFRM) and AFRM stock. 

The San Francisco-based buy-now-pay-later (BNPL) firm went public at $49 on Jan. 12, 2021, selling 24.6 million shares and raising $1.21 billion in the process. The company’s share price closed up 98.4% on its first day of trading. 

It lost some of its momentum last summer before going on a big run that saw its shares hit a 52-week high of $176.65 in early November. Since then, it has lost about 80% of its value. It now trades almost 27% below its initial public offering (IPO) price. 

Did underwriters get the IPO valuation wrong, or did investors get overly excited about the opportunity in BNPL? I’ll consider both questions.

Was AFRM Stock Overvalued at IPO?

Upon the closing of its IPO, Affirm had 246.4 million shares outstanding. Based on the price of $49 per share, it had a market capitalization of $12.1 billion heading into its first day of trading.

Its enterprise value would have been $11.5 billion based on $699 million in funding debt, $499 million in notes issued by securitization trusts, and $1.8 billion in cash and cash equivalents on a pro forma basis.   

Affirm’s annual revenue as of Jun. 30, 2020 was $509.5 millon. That is 23.7x sales. Its quarterly revenue at the end of September 2020 was $174 million. Annualized, that is $696 million, or 17.4x sales. As of Mar. 31, 2022, the company’s 12-month trailing revenue was $1.12 billion. That puts its price-to-sales (P/S) ratio at 10.8x based on its IPO valuation and 9.1x its current market cap of $10.2 billion. 

What other large-cap ($10 billion or greater) tech stocks trade for approximately 10.8x sales? About 47 out of 140, according to Finfiz.com. Further, Visa (NYSE:V) and PayPal (NASDAQ:PYPL), two big payments heavyweights, trade at 17.1x and 4.7x sales, respectively. 

So, based on these two examples, Affirm’s IPO P/S valuation doesn’t appear to have been overcooked or undercooked heading into its first day of trading. However, if you’re not comfortable investing in money-losing growth companies, your opinion might be a lot different. 

Were Investors Overly Excited About BNPL?

The Worldpay unit of Fidelity National Information Services (NYSE:FIS) recently came out with a 156-page report about BNBL that said BNPL transactions will account for $438 billion of global e-commerce transactions by 2025. That represents 5.3% of the total, up 240 basis points from 2021. 

While BNPL accounted for 3.8% of North American e-commerce transactions in 2021, Europe was way ahead at 8.1%. In the United Kingdom, BNPL is expected to account for 12.1% of total e-commerce transactions, up from 6.2% in 2021.

“Even as more customers return to the store, it is clear that there is no going back on the innovations we are seeing within fintech,” Jim Johnson, head of merchant solutions at FIS, said in a press release. “Consumers are now mirroring the way they shop online while they are at their favorite retailer — creating a more advanced blend of digital and physical payment options than we saw before the pandemic.”

While there are definite negatives associated with BNPL — the biggest being the extra fees associated with not paying on time — the use of BNPL, when done responsibly, is no different than a company judiciously managing its cash flow.

According to a survey from DebtHammer.org, 45% of shoppers have signed up for at least one BNPL plan, 41% higher from April 2021. 

I’m sure the same cautionary tales apply to general credit card use also apply to BNPL. In the hands of a shopaholic, BNPL can be lethal.

The Bottom Line on AFRM Stock

Before I could think of recommending AFRM stock for aggressive investors — it loses money, making it inappropriate for risk-averse investors — my suggestion, if you want to bet on BNPL, is to buy shares of Block (NYSE:SQ). 

Block acquired Australian BNPL Afterpay for $29 billion in February. The acquisition of Afterpay gives Block’s Square Seller and Cash App businesses a global audience. It will accelerate the company’s sales outside the U.S.

If you still want to buy Affirm after getting to know it a lot better, by all means, do. However, I need to spend a few weeks, or even months, trying to understand the company’s pros and cons beyond the fact that it loses money. If I’m comfortable with what I see, you can be sure I’ll change my tune.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.