Is Affirm Holdings a buy?

Affirm Assets ( AFRM 4.20% ) takes on credit card companies by making the payment process more transparent, flexible and forgiving, and by not charging late fees to its customers.

The fintech is off to a flying start for its IPO investors, nearly doubling on day one, though it has returned 18% since that day one. Despite its volatile beginnings, the company is worth consideration as it is aggressively growing its customer base. As Affirm makes waves and grows market share, here’s what you need to know about it.

A consumer-centric orientation with its “buy now, pay later” model

The founders of Affirm believed that the consumer should come first, so they created payment options that allow consumers to pay for their purchases in fixed amounts, without any deferred interest. The company has partnered with thousands of retailers to offer its pay-at-checkout plans to their customers. So when you buy something online at walmart or best buy and you see an option to spread your payments over six months, Affirm is the company behind this service.

The company is helping lead the “buy now, pay later” trend – or BNPL for short – which is the world’s fastest growing e-commerce payment method, according to Worldpay’s 2020 Global Payments Reports. BNPL’s market share is expected to triple to 3% of the North American e-commerce payments market by 2023, and up to 10% in emerging markets.

The disruptive payment company faces fierce competition from other BNPL players such as After-payment and PayPalas well as former credit institutions like American Express and Discover. However, Affirm is positioning itself as an alternative to credit cards, saying the industry is plagued by “restrictive, predatory and complex practices”. Affirm believes in something different: a consumer-centric approach that promotes simple and transparent payment solutions. And co-founder Max Levchin knows a thing or two about payment solutions, being one of PayPal’s original co-founders.

Payments can benefit consumers and merchants. Consumers can win with flexible payment options with no late fees — something Afterpay and PayPal both charge consumers — and merchants can win because they can increase sales and gain data insights. Merchant sales are driven by increased consumer purchasing power – including 0% APR loans – at no additional cost to consumers. The company believes in building relationships based on trust, as evidenced by its Net Promoter Score of 78 – a measure of customer experience where a score above 70 is considered excellent and the average score of the credit card industry is 30.

Putting consumers first is a noble idea, and it makes Affirm an intriguing company. That’s why the demand for the company’s stock when it went public was so high. Affirm was originally targeting an initial share price of $33-$38, investors eagerly pushed it to $49. By the time the company began trading on public exchanges, the stock had risen more than $90. While the company’s price-to-sales ratio of around 34 (at Tuesday’s prices) doesn’t make it the most expensive tech stock, it still tops the list. However, at the end of the day, what matters to investors is the results, so let’s take a look at the company’s earnings.

Current financial situation

Affirm reported revenue of $509.5 million for its fiscal year ending June 30, 2020, representing 93% growth over the prior year. Half of that revenue came from merchant network revenue — the fees Affirm earns when its payment solution helps merchants close sales. The company has partnerships with 6,500 retailers, including walmart, Target, Interactive Platoonand Shopify, and earns commissions based on its various payment products, with its 0% APR funding products earning the most. Another 36.6% of its revenue comes from the interest it charges consumers on its simple loans.

However, its aggressive expansion strategy drove operating expenses to $617.3 million during the year, up 58% from the previous year. Putting it all together, the company posted an operating loss of $107.8 million in the year, compared to $127.4 million the year before.

In its latest quarterly results, the company reported revenue of $204 million for the quarter, up 57% from the same period last year, and an operating loss of 31.7 million, compared to $32.6 million last year. The company also mentioned that it now has 4.5 million active customers, up 52% ​​from last year, helping to grow its gross merchandise volume (GMV) by 55% to 2.1 billions of dollars.

Where to go from here

At this time, Affirm’s main focus is on growing and expanding its payment network. The company is looking to tap into the growing e-commerce trend, which saw sales of $600 billion in 2019 and another $790 billion in 2020, according to the Department of Commerce.

The company’s aggressive expansion efforts have included the acquisition of PayBright, a leading provider of BNPL in Canada, as well as virtual card functionality that allows consumers to pay at physical stores on its app. The company also recently announced that it will offer physical debit cards, with CEO Levchin saying the company’s card is truly an “anti-credit card” due to its transparent payment plans and lack of fees. delay.

In 2020, its GMV was $4.6 billion, which is less than 1% of all e-commerce sales. Looking ahead, the company guided 2021 GMV between $7.25 billion and $7.35 billion, translating to 57% year-over-year volume growth in the low of range. With the increase in GMV, revenue is expected to be between $760 million and $780 million, but the company will continue to operate with an operating loss of between $120 million and $130 million.

An intriguing company in a growing market

Affirm has made huge strides in capitalizing on the BNPL trend. Its aggressive strategy is performing well, with strong revenue and GMV growth over the past few years. As consumer preferences continue to shift towards online shopping, Affirm is looking to capture more of that market share. The company’s expansion into cards could be another driver of growth, as it also seeks to capture a share of offline purchases.

Affirm is young and growing, with a great leader in Max Levchin, who is more than familiar with what it takes to build a successful payments company. Although I won’t dive into this stock at this time due to its high valuation and volatile performance, Affirm is a company I will be watching closely in the future.