Let’s take a quick look at Affirm ($AFRM) stock, which IPO’d six days ago. After pricing the IPO at $49 per share $AFRM, almost predictably, jumped 84% to $90 per share. It now sits at $114 per share.
Affirm is a technology platform for merchants that allows customers to pay for goods in fixed installments instead of all at once.
- Point of Sale: The customer sees purchase options powered by Affirm that allow them to pay for the product in fixed amounts in the form of 0% APR and interest-bearing loans. Affirm believes in transparent pricing and charges simple interest without compounding.
- Merchant Solutions: Affirm integrates these flexible payment solutions with merchants. This increases the purchasing power of consumers, which can drive sales and avoid discounting.
- Consumer Solutions: Affirm also has a consumer-focused app that allows Affirm customers to manage loan payments, open a high-yield savings account, and access a marketplace of Affirm merchants. Affirm also provides a virtual “credit” card through its app.
Affirm is benefiting from the growth of e-commerce and the rising popularity of “buy now pay later” purchases by Gen Z and Millennial consumers.
- We all know how fast e-commerce is growing, but online sales still only account for 14% of global retail sales. This should continue to grow strongly throughout our lifetimes.
- According to research, “buy now pay later” is still a small portion of e-commerce sales at only 3% in North America. In other regions, such as EMEA, it is already 6% of e-commerce sales and still growing.
- Affirm’s main competitor is Swedish bank, Klarna.
Affirm’s growth is driven by the growth of its online retail partners, like Peloton ($PTON).
- Peloton-related revenue represented 28% of Affirm’s total fiscal year 2020 revenue.
- The next seven largest vendors represented 7% of FY20 revenue.
- Affirm also has 100% dollar retention, which is a really good sign that they are seen as valuable to their merchants.
Because the business model ultimately relies on loans to consumers, Affirm’s success will also rely on its ability to accurately underwrite delinquency risk.
- In other words, Affirm needs to accurately predict who will pay back the loans and who won’t.
- Affirm’s data show that, so far, it is predicting risk better than FICO and is improving its charge off rate drastically.
Affirm is growing at 90-100% annually, mostly driven by its Merchant Network revenue.
- Gross Merchandise Volume grew by over 70%.
- Merchant Network revenue grew 160% for the latest quarter, which implies increased volumes of 0% APR loans, on which Affirm makes more money.
- Affirm had $596 million in revenue and I estimate it had $180 million in variable profit for the latest 12 month period.
$AFRM stock looks too expensive for the Big Board at this time.
- At $110 per share, Affirm is valued at $26.6 billion dollars in enterprise value.
- Even if Affirm continued to double revenues, this valuation represents 22.4x forward Revenue and 74.2x forward Gross Profit.
Affirm is typical in today’s market, with companies with around 100% growth rates are trading for extremely high multiples.
- Snowflake ($SNOW) is growing at 120% per year and trades at 108x forward Gross Profit.
- Shopify ($SHOP) is growing at 90-100% per year and trades at 69x forward Gross Profit.
I really like the business and believe this will be a huge business some day. But the valuation is high enough where I believe there are better bets we can invest in.
- Given the nascency of e-commerce credit in the U.S. and the adjacent markets Affirm can expand into, such as auto loans, I believe this could be a home run business.
- There are $4.2 trillion in total outstanding consumer loans in the U.S according to the federal reserve, which represents almost 20% of U.S. GDP of $21.5 trillion. This might imply that the market can grow by 7x, and if Affirm can be a dominant market share gainer, then I don’t see a reason why it can’t 20x over the long term.