RossT
2021-10-19
God pricing?
Affirm: In An Early Growth Stage
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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":859070250,"tweetId":"859070250","gmtCreate":1634645315507,"gmtModify":1634645315812,"author":{"id":3571876457050464,"idStr":"3571876457050464","authorId":3571876457050464,"authorIdStr":"3571876457050464","name":"RossT","avatar":"https://static.tigerbbs.com/c05489dba5744564e34adf12817967c5","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":22,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body><p>God pricing?</p></body></html>","htmlText":"<html><head></head><body><p>God pricing?</p></body></html>","text":"God pricing?","highlighted":1,"essential":1,"paper":1,"likeSize":8,"commentSize":1,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/859070250","repostId":1188285909,"repostType":4,"repost":{"id":"1188285909","kind":"news","pubTimestamp":1634644274,"share":"https://www.laohu8.com/m/news/1188285909?lang=&edition=full","pubTime":"2021-10-19 19:51","market":"us","language":"en","title":"Affirm: In An Early Growth Stage","url":"https://stock-news.laohu8.com/highlight/detail?id=1188285909","media":"seekingalpha","summary":"Summary\n\nThe high-growth fintech aspires to disrupt legacy financial institutions through its BNPL (","content":"<p><b>Summary</b></p>\n<ul>\n <li>The high-growth fintech aspires to disrupt legacy financial institutions through its BNPL (buy now, pay later) payment network.</li>\n <li>Its recent partnership with Amazon and <a href=\"https://laohu8.com/S/TGT\">Target</a> will provide further growth opportunities.</li>\n <li>However, customer concentration remains a major risk factor (its top customer is Peloton Interactive which accounts for ~20% of total revenue).</li>\n <li>After skyrocketing over 230% from its May lows, shares may see some weakness short to midterm, although the long-term outlook remains bullish.</li>\n</ul>\n<p><b><a href=\"https://laohu8.com/S/AFRM\">Affirm Holdings, Inc.</a></b> is a fast-growing financial technology company that enables consumers to buy goods online and pay later. Affirm provides microloans to users at the point of sale with participating merchants (such as Walmart or <a href=\"https://laohu8.com/S/SHOP\">Shopify</a>), with an aim to provide a quick, transparent, and more inclusive lending alternative to credit cards. The company was founded in 2012 by Max Levchin (co-founder of <a href=\"https://laohu8.com/S/PYPL\">PayPal</a>) when it spun out of startup studio HVF (\"Hard Valuable Fun”). Later, Nathan Gettings, Jeffrey Kaditz, and Alex Rampell joined Levchin in starting the business. It filed for IPO in late 2020 and began trading on the <a href=\"https://laohu8.com/S/NDAQ\">Nasdaq</a> Stock market on January 13, 2021.</p>\n<p><img src=\"https://static.tigerbbs.com/e8d0a25999b2a400b0e3efa0f5aa6c94\" tg-width=\"770\" tg-height=\"622\" referrerpolicy=\"no-referrer\"></p>\n<p>As we can see, Affirm has added many milestones in recent years, to get to its current position.</p>\n<p><b>Change in business strategy over the years (2012 – Present)</b></p>\n<p><b>2012 – 2014: Early strategy was to enter the point-of-sale(POS)financing marketplace in the U.S.</b></p>\n<p>Affirm’s beta version was launched to the public in early 2013 and the company’s first and only merchant partner was <a href=\"https://laohu8.com/S/FLWS\">1-800-Flowers.com</a> (which they used to test the concept). Affirm launched during a time when there was concern regarding the credit card companies’ transparency (hidden fees, interest rates, and potential penalties). The main idea was to offer an honest, transparent and data-driven POS financing product that every consumer can use, even if they pay in monthly installments.</p>\n<p>By mid-2014, Affirm had raised more than US$50 million in funding and formed a team of 32 people. Because of uniqueness in its algorithms and Levchin's financial relationships, Affirm fully assumed the risk of the consumer credit it underwrote. This allowed Affirm to quickly tie-up with many new merchant partners.</p>\n<p><b>2015 – Present: Strategy changed to expand its business, merchant partners, and customer base</b></p>\n<p>Following this, Affirm continued to expand its merchant base consistently (as of June 30, 2021, Affirm had ~29,000 merchants integrated on its platform). Additionally, it acquired two companies to expand its business – LendLayer in August 2015 (to boost education loans) and Sweep in April 2016 (to expand into personal finance). This led to an increase in the customer base as well – as of June 30, 2021, Affirm had >7 million active consumers.</p>\n<p>In November 2018, Affirm unveiled an updated brand and also announced an expanded suite of consumer-facing products and services. CEO and co-founder Max Levchin stated that “In the five years since we launched, our partnerships with retailers have given us incredible insight into where, how, when, and why consumers buy. We now have an opportunity to use those insights to introduce consumers to the retailers where they can get the best deal available to them with Affirm. The next evolution of our brand speaks to the confidence consumers have when they buy with us”.</p>\n<p>Also, Affirm changed its growth strategy to acquire merchants at a rapid pace – instead of directly going to merchants; Affirm engaged in partnerships with large platforms that serve online businesses. For example – in August 2020, Affirm announced a partnership with Shopify, under which Affirm’s BNPL financing solution will be made available to eligible Shopify merchants in the U.S. – this led to an exponential increase in the number of merchant partners. During its fiscal 4Q21 earnings, management noted that – “Our partnerships with enterprise merchants, and platforms like Shopify, introduce more consumers and high-velocity merchants to Affirm’s honest and transparent offerings.”</p>\n<p><img src=\"https://static.tigerbbs.com/0a95ca68fa872d48bfda949b76ae5a1a\" tg-width=\"783\" tg-height=\"501\" referrerpolicy=\"no-referrer\"></p>\n<p><b>Business model (present) – Summary</b></p>\n<p>As mentioned above, Affirm deals with both consumers and merchants; and thus generates revenue from both of them. The table below shows a quick summary of Affirm’s business model:</p>\n<p><img src=\"https://static.tigerbbs.com/0cbcf654583a71dce090d26bf4407399\" tg-width=\"704\" tg-height=\"639\" referrerpolicy=\"no-referrer\"></p>\n<p>Affirm earns interest income on the simple interest loans from originating bank partners and on the merchant site, Affirm earns a merchant fee for its services.</p>\n<p>Per <a href=\"https://laohu8.com/S/FH\">Form</a> 10K, “Our business model is aligned with the interests of both consumers and merchants — we win when they win. From merchants, we earn a fee when we help them convert a sale and power a payment. Merchant fees depend on the individual arrangement between us and each merchant and vary based on the terms of the product offering; we generally earn larger merchant fees on 0% APR financing products. For both the fiscal years ended June 30, 2021 and 2020, 0% APR financing represented 43% of total Gross Merchandise Volume (“GMV”) facilitated through our platform. This structure incentivizes us to help our merchants convert sales and increase AOV through the commerce and technology solutions offered by our platform. From consumers, we earn interest income on the simple interest loans that we purchase from our originating bank partners. Interest rates charged to our consumers vary depending on the transaction risk creditworthiness of the consumer, the repayment term selected by the consumer, the amount of the loan, and the individual arrangement with a merchant. Because consumers are never charged deferred or compounding interest, late fees, or penalties on the loans, we are not incentivized to profit from our consumers’ mistakes or misfortunes. In order to accelerate our ubiquity, we facilitate the issuance of virtual cards directly to consumers through our app, allowing them to shop with merchants that may not yet be fully integrated with Affirm. When these virtual cards are used over established card networks, we earn a portion of the interchange fee from the transaction”.</p>\n<p>Accordingly, Affirm has two main sources of revenues:<b>1) Interest charged from consumers and 2) Fee charged from merchants.</b>The other sources are Virtual Card Network Fee, Servicing Fee, and Gain/Loss on loan sales. So, Affirm reports revenues from five defined buckets: Merchant network revenue (44% of total revenue), Virtual card network revenue (6% of total revenue), Interest income (37% of total revenue), Gain on sales of loans (10% of total revenue), and Servicing income (3% of total revenue):</p>\n<ul>\n <li><p><b>Merchant network revenue:</b>As per 10K, “Merchant network revenue consists of merchant fees. Merchant partners (or merchants) are charged a fee on each transaction processed through the Affirm platform. A portion of merchant network revenue relates to affiliate network revenue, which is generated when a user makes a purchase on a merchant’s website after being directed from an advertisement on Affirm’s website or mobile application”.</p></li>\n <li><p><b>Virtual card network revenue:</b>Affirm facilitates transactions through the issuance of virtual debit cards to be used by consumers at checkout. When consumers use this virtual card, Affirm earns interchange revenue.</p></li>\n <li><p><b>Interest income:</b>Income which is earned on the simple interest loans from originating bank partners. Per 10K, “Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding.”</p></li>\n <li><p><b>Gain/ (loss) on sales of loans:</b>This revenue component fluctuates depending on the expected performance of the loans and their carrying value. Per 10K, “When a loan is sold to a third-party loan buyer, the unamortized discount is released in full at the time of sale and recognized as part of the gain or loss on sales of loans”.</p></li>\n <li><p><b>Servicing income:</b>Per 10K, “Servicing fees are contractual fees specified in our servicing agreements with third-party loan owners that are earned from providing professional services to manage loan portfolios on their behalf”.</p></li>\n</ul>\n<p>The below table summarizes consolidated network revenue (includes both Merchant network revenue and Virtual card network revenue) take rate and the illustrative network revenue take rate by Affirm’s financial product.</p>\n<p><img src=\"https://static.tigerbbs.com/7418596930867199d06473d596d678fd\" tg-width=\"1048\" tg-height=\"482\" referrerpolicy=\"no-referrer\"></p>\n<p><b>Market opportunity/ Industry outlook</b></p>\n<p>Affirm's market has benefitted from the COVID crisis and the rapid acceleration to e-commerce.</p>\n<ul>\n <li><p><b>Macro Outlook:</b>According to arecent reportby eMarketer, global online sales grew 25.7% to approximately $4.2 trillion in 2020 and are expected to grow to approximately $7.4 trillion by 2025. Currently, e-commerce only accounts for 17.8% of total retail sales, which is also expected to increase to 24.5% of total retail sales in 2025. In S-1, management mentioned that “Every element of commerce is moving online, from storefronts, to order fulfillment, to payment and checkout experiences. Gen Z and Millennials are early and frequent adopters of e-commerce and tend to prefer the ease, flexibility, and greater selection offered by shopping online. For example, almost 70% of Millennials prefer shopping online, according to Statista.”</p></li>\n <li><p><b>Expansion in “Buy now pay later” market share:</b>Per S-1, “Consumers increasingly prefer more flexible and innovative digital payment solutions over traditional credit payment options. According to Worldpay’s 2020 <a href=\"https://laohu8.com/S/GPN\">Global Payments</a> report, “buy now pay later” is the fastest-growing e-commerce payment method globally. In North America, “buy now pay later” market share is expected to triple to 3% of the e-commerce payments market by 2023. In other regions, such as EMEA, “buy now pay later” already accounts for almost 6% of the e-commerce payment market, and is expected to grow to almost 10% by 2023”.</p></li>\n <li><p><b>Preference shifting towards new financial products:</b>Per S-1, “according to TD Bank’s Annual Consumer Spending Index, approximately 25% of Millennials do not carry credit cards and according to a survey conducted by the <a href=\"https://laohu8.com/S/HRS\">Harris</a> Poll in 2020, 64% of Americans would consider purchasing or applying for financial products through a technology company’s platform instead of a traditional financial services provider.”</p></li>\n</ul>\n<p><b>Competitive advantage</b></p>\n<p>Like any market, the buy-now-pay-later space is also highly competitive. Affirm’s primary competition are legacy payment methods such as credit and debit cards, provided by Citibank, <a href=\"https://laohu8.com/S/AXP\">American Express</a>, <a href=\"https://laohu8.com/S/BAC\">Bank of America</a>, etc. Additionally, it faces competition from technology-driven solutions by payment companies (<a href=\"https://laohu8.com/S/V\">Visa</a>, <a href=\"https://laohu8.com/S/MA\">MasterCard</a>, etc), from mobile wallets (PayPal, etc), and from other pay-over-time solutions companies (Afterpay, Klarna, etc).</p>\n<p>However, Affirm’s business model benefits from self-reinforcing network effects (see below graph) which strengthens with every transaction (Per S-1, “The net result of this is that we are building a consumer and merchant ecosystem on our platform that we expect to continue to grow and monetize over time”). In addition, its solutions use the latest and other modern tools to create differentiated and scalable products.</p>\n<p>Not only this, management has continuously focused on its product engineering and development. In its fiscal 4Q21 conference call, management mentioned that “we plan to deliver an exciting slate of consumer and merchant product offerings in fiscal 2022 as well as over the next several years. To drive the success of those initiatives, we are investing in engineering and product talent here in the U.S. and deploying a new engineering center in Poland. As a result, we expect significant investment in technology and data analytics in fiscal 2022. We are also increasing our spending on marketing to drive consumer awareness and adoption”.</p>\n<p><img src=\"https://static.tigerbbs.com/dd2425797b3f6e89fdcf18becf0ac9f5\" tg-width=\"621\" tg-height=\"628\" referrerpolicy=\"no-referrer\"></p>\n<p>Furthermore, its expertise in sourcing, aggregating, protecting, and analyzing data has been what management believes to be a core competitive advantage of its platform which distinguishes it from competitors.</p>\n<p><b>Growth areas/ drivers</b></p>\n<p>Below are some of the growth areas, which can provide additional revenue streams:</p>\n<ul>\n <li><p><b>Partnership with Amazon/Target:</b>In late August 2021, Affirmannounceda new partnership with Amazon, which could unlock new growth opportunities. As Amazon serves over 300 million active customers worldwide, the partnership will expand Affirm's total addressable market significantly. In its recent outlook for FY22, management has not included any GMV or Revenue from the Amazon partnership as they are currently in the early stages of integration. Thus, Affirm's revenue will surely soar further as Amazon rolls out the BNPL features for the shoppers. <a href=\"https://laohu8.com/S/JE\">Just</a> recently, Affirm jumped over 20% afterannouncinga partnership with Target, stating that \"clients want easy and affordable payment options that work within their family’s budget\".</p></li>\n <li><p><b><a href=\"https://laohu8.com/S/NGD\">New</a> product offerings:</b>In February 2021, Affirm announced plans for the Affirm Card, the first U.S. debit card that will allow customers to make installment payments on any purchase at any merchant. Management expects that “as it launches unique new offerings such as Affirm Debit+ and activates exciting new merchant partnerships, it sees a very bright long-term future for Affirm.” Additionally, the Savings product (introduced at the start of FY21) attracted total deposits of about three-hundred million dollars without any promotion.</p></li>\n <li><p><b>Expansion through acquisitions:</b>Recently, in 2021, Affirm completed the acquisitions of PayBright (Canada’s leading buy-now-pay-later providers) and Returnly (a leader in online return experiences and post-purchase payment). Per management, “PayBright's complimentary merchant relationships and first-mover advantage in Canada will enable it to expand its scale and reach across North America. Also, 8 million people have used Returnly successfully and that's another sort of cross-booster for the products on the Affirm side”. Thus, Affirm can expand its total addressable market meaningfully by doing these kinds of acquisitions.</p></li>\n <li><p><b>Customer retention:</b>Affirm has also shown good merchant retention. Per S-1, “We believe we also increase customer conversion for merchants, leading to strong merchant retention rates as evidenced by our dollar-based merchant expansion rate that has consistently exceeded 100% since 2016. We believe that sustaining this value proposition will allow us to continue expanding revenue from existing merchants”.</p><p><img src=\"https://static.tigerbbs.com/8ff8be0273ce14552cbed9151868dc35\" tg-width=\"766\" tg-height=\"644\" referrerpolicy=\"no-referrer\"></p></li>\n</ul>\n<p><b>Risks</b></p>\n<p>Besides growth drivers, we would also like to point out the ‘Merchant Concentration risk’. Its top merchant partner, <a href=\"https://laohu8.com/S/PTON\">Peloton Interactive, Inc.</a> contributed 20%, 28%, and 20% of total revenue for FY21, FY20, and FY19, respectively. Also, its top ten merchants represented 25%, 35%, and 30% of total revenue for FY21, FY20, and FY19, respectively.</p>\n<p>Management itself has mentioned in its 10K that “A large percentage of our revenue is concentrated with a single merchant partner; and the loss of this merchant partner or any other significant merchant relationships would materially and adversely affect our business, results of operations, financial condition, and future prospects”. So, Affirm needs to diversify this risk as quickly as possible. We think management is trying their best in this regard – as in its fiscal 4Q21 press release, it mentioned that “In fiscal 2022, Affirm expects GMV to grow faster than revenue as the Company's GMV mix shifts toward shorter duration Split Pay volume, and the volume coming from longer-duration Peloton financing de-concentrates”.</p>\n<p><b>Key operating metrics</b></p>\n<p>Affirm highlights below as key operating metrics, which indicate the performance of the company over time.</p>\n<p><b>Gross Merchandise Volume (\"GMV\"):</b>GMV is defined as the total dollar amount of all transactions on the Affirm platform during the applicable period, net of refunds. It does not represent revenue earned by Affirm; however, the GMV processed through its platform is an indicator of the success of its merchants, value provided to the consumers, and the strength of the platform.</p>\n<p><b>Active Consumers:</b>This is defined as the number of consumers who engage in at least <a href=\"https://laohu8.com/S/AONE.U\">one</a> transaction on Affirm’s platform during the twelve months prior to the measurement date.</p>\n<p><b>Transactions per Active Consumer:</b>This is a key driver of the contribution margin & operating efficiency and is defined as the average number of transactions that an active consumer has conducted on the platform prior to the measurement date.</p>\n<p><b>Average order value (“AOV”):</b>AOV is defined as GMV divided by the number of transactions conducted on the Affirm platform during the period.</p>\n<p>The graphs below clearly show that the above metrics have improved significantly, leading to a solid financial performance:</p>\n<table>\n <tbody>\n <tr>\n <td><p><img src=\"https://static.tigerbbs.com/766c8df0cdb8566d1a0958efe9f1e98b\" tg-width=\"996\" tg-height=\"495\" referrerpolicy=\"no-referrer\"></p><p><img src=\"https://static.tigerbbs.com/d65c4790d4c437246366e6b288bb2f53\" tg-width=\"935\" tg-height=\"491\" referrerpolicy=\"no-referrer\"></p><p>Source: Company S-1 report</p></td>\n </tr>\n </tbody>\n</table>\n<p>Financial performance overview</p>\n<p>Affirm’s revenue has been constantly increasing over the years and management expects a solid growth rate (~35%) for FY2022 as in its recent fiscal 4Q21 results, it stated that “Through our host of integrated partnerships with the largest merchants in e-commerce and brick-and-mortar retail, Affirm will be offered as a payment option for merchants representing more than half of U.S. e-commerce, which we believe will ultimately enable us to demonstrate Affirm’s powerful value proposition to millions of new-to-Affirm consumers and grow Active Consumers meaningfully in fiscal 2022.”</p>\n<p>To understand why management seems so confident of its financial performance going forward, we are providing a short summary of fiscal 4Q21 results –</p>\n<p>In 4Q21, total revenue increased 71% year-on-year, driven by increases in network revenue and interest income, related to growth in GMV and loans held for investment, respectively, as well as gains on loan sales. Additionally, GMV was $2.5 billion, an increase of 106%, or 178% excluding Peloton, and transactions per active consumer increased 8%.</p>\n<table>\n <tbody>\n <tr>\n <td><p><img src=\"https://static.tigerbbs.com/216aa62b650dd2a3eb1775ff9dd8d943\" tg-width=\"1046\" tg-height=\"562\" referrerpolicy=\"no-referrer\"></p><p>Source: Company reports</p></td>\n </tr>\n </tbody>\n</table>\n<p>The below graph provides a quick recap of quarterly revenues from 1Q19-4Q21 along with the growth rates:</p>\n<table>\n <tbody>\n <tr>\n <td><p><img src=\"https://static.tigerbbs.com/a845bdf51da5c0d559ea97c12da57d27\" tg-width=\"1280\" tg-height=\"699\" referrerpolicy=\"no-referrer\"></p><p>Source: Company S-1 report</p></td>\n </tr>\n </tbody>\n</table>\n<p>The below graph provides an overview of Operating Expenses as a Percentage of Revenue during 1Q19-4Q21. Furthermore, Affirm is expected to continue growing rapidly, as shown in current analyst predictions. That said, revenue is expected to reach nearly $2 billion by 2024. Since Affirm has widely beaten estimates in the past, these are likely conservative predictions.</p>\n<table>\n <tbody>\n <tr>\n <td><p><img src=\"https://static.tigerbbs.com/63dccecbe6d566ec6aea221aefb9861c\" tg-width=\"1167\" tg-height=\"856\" referrerpolicy=\"no-referrer\"></p></td>\n </tr>\n <tr>\n <td><p>Source: Company S-1 report and estimates</p></td>\n </tr>\n </tbody>\n</table>\n<p><b>Valuation</b></p>\n<p>Since Affirm is still in early stages of growth, an illustrative range of comparable Price to Sales multiples can be used to value the Affirm. At a market cap of $39.9 billion, Affirm currently trades at around 27 sales, on a forward basis, considering estimates of $1.6 billion in Fiscal 2023. Certainly, this is not cheap by any means, but it is important to take growth rates into account when comparing Affirm to its peers. For instance, PayPal and <a href=\"https://laohu8.com/S/SQ\">Square</a> are trading at a more favorable valuation, yet are growing at a substantially lower rate. After all, Square acquired Afterpay for $29 billion, while the company is currently generating less than $1 billion in annual revenue. At the same time, Swedish fintech firm Klarna, has reportedly raised money at a $46 billion valuation. Nevertheless, it is unlikely that Affirm's valuation will expand further, which could put downside pressure on shares in the short to mid-term.</p>\n<p><img src=\"https://static.tigerbbs.com/5fce705e2cff3f0143537a6546315c3c\" tg-width=\"635\" tg-height=\"583\" referrerpolicy=\"no-referrer\">Data byYChartsManagement and leadership</p>\n<p>The Affirm team is led by superior Co-founders and a management team with credentials from the world’s leading companies (like PayPal, <a href=\"https://laohu8.com/S/COF\">Capital One</a>, HP, etc).</p>\n<p><b>Max Levchin:</b>Max serves as the CEO and is a co-founder. He is a B.S. in Computer Science from the University of Illinois at Urbana-Champaign, where he founded and led four other technology startups. Mr. Levchin also co-founded PayPal, where he served as Chief Technology Officer from its founding until its sale to <a href=\"https://laohu8.com/S/EBAYL\">eBay</a> in 2003.</p>\n<p><b>Sandeep Bhandari:</b>Bhandari serves as the company’s Chief Strategy Officer since 2017. Prior to Affirm, he had worked at <a href=\"https://laohu8.com/S/LC\">LendingClub</a> and Capital One serving various roles.</p>\n<p><b>Michael Linford:</b>Linford serves as Chief Financial Officer since 2018. Prior to Affirm, he had worked at <a href=\"https://laohu8.com/S/HPQ\">HP Inc</a>, <a href=\"https://laohu8.com/S/HPE\">Hewlett Packard Enterprise</a> Company, and Micro Focus International plc serving various roles.</p>\n<p>Other key positions include Katherine Adkins as Chief Legal and Compliance Officer, Greg Fisher as Chief Marketing Officer, and Libor Michalek as President, Technology, Risk, and Operations.</p>\n<p><b>Conclusion</b></p>\n<p>Affirm continues to increase market share in the BNPL industry, which is quickly gaining momentum, as personal finance is changing drastically. While shares are trading at an EV/ LTM revenue multiple of roughly 46 times, we think that the favorable macroeconomic outlook, growing consumer preference towards BNPL, and the company’s strategy of increasing merchant/ partner network coupled with new product offerings will further provide upside potential. Moreover, Affirm is led by one of the most successful entrepreneurs, Max Levchin, who plans on taking Affirm to new heights. Lastly, the recently announced Amazon and Target partnerships will play an important factor, although we suggest keeping a watch on the concentration risk as well.</p>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Affirm: In An Early Growth Stage</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAffirm: In An Early Growth Stage\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-10-19 19:51 GMT+8 <a href=https://seekingalpha.com/article/4460536-affirm-in-an-early-growth-stage><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nThe high-growth fintech aspires to disrupt legacy financial institutions through its BNPL (buy now, pay later) payment network.\nIts recent partnership with Amazon and Target will provide ...</p>\n\n<a href=\"https://seekingalpha.com/article/4460536-affirm-in-an-early-growth-stage\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"SSI":"Stage Stores Inc","AFRM":"Affirm Holdings, Inc."},"source_url":"https://seekingalpha.com/article/4460536-affirm-in-an-early-growth-stage","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1188285909","content_text":"Summary\n\nThe high-growth fintech aspires to disrupt legacy financial institutions through its BNPL (buy now, pay later) payment network.\nIts recent partnership with Amazon and Target will provide further growth opportunities.\nHowever, customer concentration remains a major risk factor (its top customer is Peloton Interactive which accounts for ~20% of total revenue).\nAfter skyrocketing over 230% from its May lows, shares may see some weakness short to midterm, although the long-term outlook remains bullish.\n\nAffirm Holdings, Inc. is a fast-growing financial technology company that enables consumers to buy goods online and pay later. Affirm provides microloans to users at the point of sale with participating merchants (such as Walmart or Shopify), with an aim to provide a quick, transparent, and more inclusive lending alternative to credit cards. The company was founded in 2012 by Max Levchin (co-founder of PayPal) when it spun out of startup studio HVF (\"Hard Valuable Fun”). Later, Nathan Gettings, Jeffrey Kaditz, and Alex Rampell joined Levchin in starting the business. It filed for IPO in late 2020 and began trading on the Nasdaq Stock market on January 13, 2021.\n\nAs we can see, Affirm has added many milestones in recent years, to get to its current position.\nChange in business strategy over the years (2012 – Present)\n2012 – 2014: Early strategy was to enter the point-of-sale(POS)financing marketplace in the U.S.\nAffirm’s beta version was launched to the public in early 2013 and the company’s first and only merchant partner was 1-800-Flowers.com (which they used to test the concept). Affirm launched during a time when there was concern regarding the credit card companies’ transparency (hidden fees, interest rates, and potential penalties). The main idea was to offer an honest, transparent and data-driven POS financing product that every consumer can use, even if they pay in monthly installments.\nBy mid-2014, Affirm had raised more than US$50 million in funding and formed a team of 32 people. Because of uniqueness in its algorithms and Levchin's financial relationships, Affirm fully assumed the risk of the consumer credit it underwrote. This allowed Affirm to quickly tie-up with many new merchant partners.\n2015 – Present: Strategy changed to expand its business, merchant partners, and customer base\nFollowing this, Affirm continued to expand its merchant base consistently (as of June 30, 2021, Affirm had ~29,000 merchants integrated on its platform). Additionally, it acquired two companies to expand its business – LendLayer in August 2015 (to boost education loans) and Sweep in April 2016 (to expand into personal finance). This led to an increase in the customer base as well – as of June 30, 2021, Affirm had >7 million active consumers.\nIn November 2018, Affirm unveiled an updated brand and also announced an expanded suite of consumer-facing products and services. CEO and co-founder Max Levchin stated that “In the five years since we launched, our partnerships with retailers have given us incredible insight into where, how, when, and why consumers buy. We now have an opportunity to use those insights to introduce consumers to the retailers where they can get the best deal available to them with Affirm. The next evolution of our brand speaks to the confidence consumers have when they buy with us”.\nAlso, Affirm changed its growth strategy to acquire merchants at a rapid pace – instead of directly going to merchants; Affirm engaged in partnerships with large platforms that serve online businesses. For example – in August 2020, Affirm announced a partnership with Shopify, under which Affirm’s BNPL financing solution will be made available to eligible Shopify merchants in the U.S. – this led to an exponential increase in the number of merchant partners. During its fiscal 4Q21 earnings, management noted that – “Our partnerships with enterprise merchants, and platforms like Shopify, introduce more consumers and high-velocity merchants to Affirm’s honest and transparent offerings.”\n\nBusiness model (present) – Summary\nAs mentioned above, Affirm deals with both consumers and merchants; and thus generates revenue from both of them. The table below shows a quick summary of Affirm’s business model:\n\nAffirm earns interest income on the simple interest loans from originating bank partners and on the merchant site, Affirm earns a merchant fee for its services.\nPer Form 10K, “Our business model is aligned with the interests of both consumers and merchants — we win when they win. From merchants, we earn a fee when we help them convert a sale and power a payment. Merchant fees depend on the individual arrangement between us and each merchant and vary based on the terms of the product offering; we generally earn larger merchant fees on 0% APR financing products. For both the fiscal years ended June 30, 2021 and 2020, 0% APR financing represented 43% of total Gross Merchandise Volume (“GMV”) facilitated through our platform. This structure incentivizes us to help our merchants convert sales and increase AOV through the commerce and technology solutions offered by our platform. From consumers, we earn interest income on the simple interest loans that we purchase from our originating bank partners. Interest rates charged to our consumers vary depending on the transaction risk creditworthiness of the consumer, the repayment term selected by the consumer, the amount of the loan, and the individual arrangement with a merchant. Because consumers are never charged deferred or compounding interest, late fees, or penalties on the loans, we are not incentivized to profit from our consumers’ mistakes or misfortunes. In order to accelerate our ubiquity, we facilitate the issuance of virtual cards directly to consumers through our app, allowing them to shop with merchants that may not yet be fully integrated with Affirm. When these virtual cards are used over established card networks, we earn a portion of the interchange fee from the transaction”.\nAccordingly, Affirm has two main sources of revenues:1) Interest charged from consumers and 2) Fee charged from merchants.The other sources are Virtual Card Network Fee, Servicing Fee, and Gain/Loss on loan sales. So, Affirm reports revenues from five defined buckets: Merchant network revenue (44% of total revenue), Virtual card network revenue (6% of total revenue), Interest income (37% of total revenue), Gain on sales of loans (10% of total revenue), and Servicing income (3% of total revenue):\n\nMerchant network revenue:As per 10K, “Merchant network revenue consists of merchant fees. Merchant partners (or merchants) are charged a fee on each transaction processed through the Affirm platform. A portion of merchant network revenue relates to affiliate network revenue, which is generated when a user makes a purchase on a merchant’s website after being directed from an advertisement on Affirm’s website or mobile application”.\nVirtual card network revenue:Affirm facilitates transactions through the issuance of virtual debit cards to be used by consumers at checkout. When consumers use this virtual card, Affirm earns interchange revenue.\nInterest income:Income which is earned on the simple interest loans from originating bank partners. Per 10K, “Interest income on a loan is accrued daily, based on the finance charge disclosed to the consumer, over the term of the loan based upon the principal outstanding.”\nGain/ (loss) on sales of loans:This revenue component fluctuates depending on the expected performance of the loans and their carrying value. Per 10K, “When a loan is sold to a third-party loan buyer, the unamortized discount is released in full at the time of sale and recognized as part of the gain or loss on sales of loans”.\nServicing income:Per 10K, “Servicing fees are contractual fees specified in our servicing agreements with third-party loan owners that are earned from providing professional services to manage loan portfolios on their behalf”.\n\nThe below table summarizes consolidated network revenue (includes both Merchant network revenue and Virtual card network revenue) take rate and the illustrative network revenue take rate by Affirm’s financial product.\n\nMarket opportunity/ Industry outlook\nAffirm's market has benefitted from the COVID crisis and the rapid acceleration to e-commerce.\n\nMacro Outlook:According to arecent reportby eMarketer, global online sales grew 25.7% to approximately $4.2 trillion in 2020 and are expected to grow to approximately $7.4 trillion by 2025. Currently, e-commerce only accounts for 17.8% of total retail sales, which is also expected to increase to 24.5% of total retail sales in 2025. In S-1, management mentioned that “Every element of commerce is moving online, from storefronts, to order fulfillment, to payment and checkout experiences. Gen Z and Millennials are early and frequent adopters of e-commerce and tend to prefer the ease, flexibility, and greater selection offered by shopping online. For example, almost 70% of Millennials prefer shopping online, according to Statista.”\nExpansion in “Buy now pay later” market share:Per S-1, “Consumers increasingly prefer more flexible and innovative digital payment solutions over traditional credit payment options. According to Worldpay’s 2020 Global Payments report, “buy now pay later” is the fastest-growing e-commerce payment method globally. In North America, “buy now pay later” market share is expected to triple to 3% of the e-commerce payments market by 2023. In other regions, such as EMEA, “buy now pay later” already accounts for almost 6% of the e-commerce payment market, and is expected to grow to almost 10% by 2023”.\nPreference shifting towards new financial products:Per S-1, “according to TD Bank’s Annual Consumer Spending Index, approximately 25% of Millennials do not carry credit cards and according to a survey conducted by the Harris Poll in 2020, 64% of Americans would consider purchasing or applying for financial products through a technology company’s platform instead of a traditional financial services provider.”\n\nCompetitive advantage\nLike any market, the buy-now-pay-later space is also highly competitive. Affirm’s primary competition are legacy payment methods such as credit and debit cards, provided by Citibank, American Express, Bank of America, etc. Additionally, it faces competition from technology-driven solutions by payment companies (Visa, MasterCard, etc), from mobile wallets (PayPal, etc), and from other pay-over-time solutions companies (Afterpay, Klarna, etc).\nHowever, Affirm’s business model benefits from self-reinforcing network effects (see below graph) which strengthens with every transaction (Per S-1, “The net result of this is that we are building a consumer and merchant ecosystem on our platform that we expect to continue to grow and monetize over time”). In addition, its solutions use the latest and other modern tools to create differentiated and scalable products.\nNot only this, management has continuously focused on its product engineering and development. In its fiscal 4Q21 conference call, management mentioned that “we plan to deliver an exciting slate of consumer and merchant product offerings in fiscal 2022 as well as over the next several years. To drive the success of those initiatives, we are investing in engineering and product talent here in the U.S. and deploying a new engineering center in Poland. As a result, we expect significant investment in technology and data analytics in fiscal 2022. We are also increasing our spending on marketing to drive consumer awareness and adoption”.\n\nFurthermore, its expertise in sourcing, aggregating, protecting, and analyzing data has been what management believes to be a core competitive advantage of its platform which distinguishes it from competitors.\nGrowth areas/ drivers\nBelow are some of the growth areas, which can provide additional revenue streams:\n\nPartnership with Amazon/Target:In late August 2021, Affirmannounceda new partnership with Amazon, which could unlock new growth opportunities. As Amazon serves over 300 million active customers worldwide, the partnership will expand Affirm's total addressable market significantly. In its recent outlook for FY22, management has not included any GMV or Revenue from the Amazon partnership as they are currently in the early stages of integration. Thus, Affirm's revenue will surely soar further as Amazon rolls out the BNPL features for the shoppers. Just recently, Affirm jumped over 20% afterannouncinga partnership with Target, stating that \"clients want easy and affordable payment options that work within their family’s budget\".\nNew product offerings:In February 2021, Affirm announced plans for the Affirm Card, the first U.S. debit card that will allow customers to make installment payments on any purchase at any merchant. Management expects that “as it launches unique new offerings such as Affirm Debit+ and activates exciting new merchant partnerships, it sees a very bright long-term future for Affirm.” Additionally, the Savings product (introduced at the start of FY21) attracted total deposits of about three-hundred million dollars without any promotion.\nExpansion through acquisitions:Recently, in 2021, Affirm completed the acquisitions of PayBright (Canada’s leading buy-now-pay-later providers) and Returnly (a leader in online return experiences and post-purchase payment). Per management, “PayBright's complimentary merchant relationships and first-mover advantage in Canada will enable it to expand its scale and reach across North America. Also, 8 million people have used Returnly successfully and that's another sort of cross-booster for the products on the Affirm side”. Thus, Affirm can expand its total addressable market meaningfully by doing these kinds of acquisitions.\nCustomer retention:Affirm has also shown good merchant retention. Per S-1, “We believe we also increase customer conversion for merchants, leading to strong merchant retention rates as evidenced by our dollar-based merchant expansion rate that has consistently exceeded 100% since 2016. We believe that sustaining this value proposition will allow us to continue expanding revenue from existing merchants”.\n\nRisks\nBesides growth drivers, we would also like to point out the ‘Merchant Concentration risk’. Its top merchant partner, Peloton Interactive, Inc. contributed 20%, 28%, and 20% of total revenue for FY21, FY20, and FY19, respectively. Also, its top ten merchants represented 25%, 35%, and 30% of total revenue for FY21, FY20, and FY19, respectively.\nManagement itself has mentioned in its 10K that “A large percentage of our revenue is concentrated with a single merchant partner; and the loss of this merchant partner or any other significant merchant relationships would materially and adversely affect our business, results of operations, financial condition, and future prospects”. So, Affirm needs to diversify this risk as quickly as possible. We think management is trying their best in this regard – as in its fiscal 4Q21 press release, it mentioned that “In fiscal 2022, Affirm expects GMV to grow faster than revenue as the Company's GMV mix shifts toward shorter duration Split Pay volume, and the volume coming from longer-duration Peloton financing de-concentrates”.\nKey operating metrics\nAffirm highlights below as key operating metrics, which indicate the performance of the company over time.\nGross Merchandise Volume (\"GMV\"):GMV is defined as the total dollar amount of all transactions on the Affirm platform during the applicable period, net of refunds. It does not represent revenue earned by Affirm; however, the GMV processed through its platform is an indicator of the success of its merchants, value provided to the consumers, and the strength of the platform.\nActive Consumers:This is defined as the number of consumers who engage in at least one transaction on Affirm’s platform during the twelve months prior to the measurement date.\nTransactions per Active Consumer:This is a key driver of the contribution margin & operating efficiency and is defined as the average number of transactions that an active consumer has conducted on the platform prior to the measurement date.\nAverage order value (“AOV”):AOV is defined as GMV divided by the number of transactions conducted on the Affirm platform during the period.\nThe graphs below clearly show that the above metrics have improved significantly, leading to a solid financial performance:\n\n\n\nSource: Company S-1 report\n\n\n\nFinancial performance overview\nAffirm’s revenue has been constantly increasing over the years and management expects a solid growth rate (~35%) for FY2022 as in its recent fiscal 4Q21 results, it stated that “Through our host of integrated partnerships with the largest merchants in e-commerce and brick-and-mortar retail, Affirm will be offered as a payment option for merchants representing more than half of U.S. e-commerce, which we believe will ultimately enable us to demonstrate Affirm’s powerful value proposition to millions of new-to-Affirm consumers and grow Active Consumers meaningfully in fiscal 2022.”\nTo understand why management seems so confident of its financial performance going forward, we are providing a short summary of fiscal 4Q21 results –\nIn 4Q21, total revenue increased 71% year-on-year, driven by increases in network revenue and interest income, related to growth in GMV and loans held for investment, respectively, as well as gains on loan sales. Additionally, GMV was $2.5 billion, an increase of 106%, or 178% excluding Peloton, and transactions per active consumer increased 8%.\n\n\n\nSource: Company reports\n\n\n\nThe below graph provides a quick recap of quarterly revenues from 1Q19-4Q21 along with the growth rates:\n\n\n\nSource: Company S-1 report\n\n\n\nThe below graph provides an overview of Operating Expenses as a Percentage of Revenue during 1Q19-4Q21. Furthermore, Affirm is expected to continue growing rapidly, as shown in current analyst predictions. That said, revenue is expected to reach nearly $2 billion by 2024. Since Affirm has widely beaten estimates in the past, these are likely conservative predictions.\n\n\n\n\n\n\nSource: Company S-1 report and estimates\n\n\n\nValuation\nSince Affirm is still in early stages of growth, an illustrative range of comparable Price to Sales multiples can be used to value the Affirm. At a market cap of $39.9 billion, Affirm currently trades at around 27 sales, on a forward basis, considering estimates of $1.6 billion in Fiscal 2023. Certainly, this is not cheap by any means, but it is important to take growth rates into account when comparing Affirm to its peers. For instance, PayPal and Square are trading at a more favorable valuation, yet are growing at a substantially lower rate. After all, Square acquired Afterpay for $29 billion, while the company is currently generating less than $1 billion in annual revenue. At the same time, Swedish fintech firm Klarna, has reportedly raised money at a $46 billion valuation. Nevertheless, it is unlikely that Affirm's valuation will expand further, which could put downside pressure on shares in the short to mid-term.\nData byYChartsManagement and leadership\nThe Affirm team is led by superior Co-founders and a management team with credentials from the world’s leading companies (like PayPal, Capital One, HP, etc).\nMax Levchin:Max serves as the CEO and is a co-founder. He is a B.S. in Computer Science from the University of Illinois at Urbana-Champaign, where he founded and led four other technology startups. Mr. Levchin also co-founded PayPal, where he served as Chief Technology Officer from its founding until its sale to eBay in 2003.\nSandeep Bhandari:Bhandari serves as the company’s Chief Strategy Officer since 2017. Prior to Affirm, he had worked at LendingClub and Capital One serving various roles.\nMichael Linford:Linford serves as Chief Financial Officer since 2018. Prior to Affirm, he had worked at HP Inc, Hewlett Packard Enterprise Company, and Micro Focus International plc serving various roles.\nOther key positions include Katherine Adkins as Chief Legal and Compliance Officer, Greg Fisher as Chief Marketing Officer, and Libor Michalek as President, Technology, Risk, and Operations.\nConclusion\nAffirm continues to increase market share in the BNPL industry, which is quickly gaining momentum, as personal finance is changing drastically. While shares are trading at an EV/ LTM revenue multiple of roughly 46 times, we think that the favorable macroeconomic outlook, growing consumer preference towards BNPL, and the company’s strategy of increasing merchant/ partner network coupled with new product offerings will further provide upside potential. Moreover, Affirm is led by one of the most successful entrepreneurs, Max Levchin, who plans on taking Affirm to new heights. Lastly, the recently announced Amazon and Target partnerships will play an important factor, although we suggest keeping a watch on the concentration risk as well.","news_type":1},"isVote":1,"tweetType":1,"viewCount":177,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":11,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/859070250"}
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