Affirm IPO Analysis

Affirm

Ticker: AFRM

IPO Date: 1/13/2021

24.6M shares (~28.29M if UWs exercise option to purchase additional ordinary shares in full), range: 33-38, shares outstanding: ~242.7M (~246.4M if UWs exercise option to purchase additional ordinary shares in full *includes Class A & Class B shares*), value: ~$823.9M (~$948.4M with UWs shares), Market cap: ~$8.6B at midpoint of range $35.50/share (info from IPO Scoop and S-1)

Banks: Morgan, Goldman, Allen (secondary UWs: RBC, Credit Suisse, Barclays, Truist Securities, Siebert Williams Shank, Deutsche Bank) (all per IPO Scoop)

Employees: 916 (per IPO Scoop)

Founded: 2012 (per IPO Scoop)

Summary –

• We are building the next generation platform for digital and mobile-first commerce. We believe by using modern technology, the very best engineering talent, and a mission-driven approach we can reinvent the payment experience. Our solutions, which are built on trust and transparency, make it easier for consumers to spend responsibly and with confidence, easier for merchants to convert sales and grow, and easier for commerce to thrive. à An honest payment solution with nothing hidden from both merchants and consumers. Seems pretty straightforward.
• Our Mission
  • Deliver honest financial products that improve lives

S-1 notes:

• Our point-of-sale solution allows consumers to pay for purchases in fixed amounts without deferred interest, hidden fees, or penalties. We empower consumers to pay over time rather than paying for a product entirely upfront. This increases consumers’ purchasing power and gives them more control and flexibility. Our platform facilitates both true 0% APR payment options and interest bearing loans. With 0% APR, consumers pay zero interest and zero additional costs. On the interest bearing loans we facilitate, we charge simple interest, which means consumers pay fixed amounts of interest that they agree to up front, and the interest never compounds. We believe in treating people fairly, which is why consumers never pay more than what was agreed to at checkout, even if they miss a payment. Paying with Affirm not only protects consumers from hidden fees but allows them to avoid traps such as deferred interest.
• We offer merchants highly effective commerce solutions that enhance demand generation and customer acquisition. Our solutions empower merchants to more efficiently promote and sell their products, optimize their customer acquisition strategies, and drive incremental sales. Our flexible payment solutions allow merchants to solve affordability for their customers, providing a revenue accelerator while avoiding discounting and other expensive marketing and promotional channels. We also provide valuable product-level data and insights — information that merchants cannot easily get elsewhere — to better inform their marketing strategies. Our approach allows us to add value throughout the full customer lifecycle, from acquisition, to conversion, to repeat transactions. à Also a merchant platform.
• Our business benefits from broader trends in technology, retail, finance, and e-commerce. For example, Gen Z and Millennials, people born between 1981 and 2012, now comprise the largest proportion of the U.S. population and are driving the rapid growth in e-commerce as every element of commerce moves online. The spending power of this new generation of consumers continues to expand significantly, reaching over $2.5 trillion in 2020, according to YPulse. Most importantly, we believe these consumers are also increasingly looking to solutions like “buy now pay later” as superior, more transparent payment options that match their demand for technology and mobile first-solutions. This trend has been accelerated by an erosion of trust in legacy financial institutions as consumers look to mission-driven technology companies for new financial products, according to American Banker. à The shift to easy solutions for everything and wanting stuff now without headaches. Also, $2.5 trillion in spending in 2020 by the Gen Z + Millennials is a serious number.
• We believe that technology, underwriting, and managing risk are collectively our key competitive advantage. We believe our proprietary technology platform and data give us a unique advantage in understanding consumers and merchants, as well as pricing risk — which we can almost always accomplish within seconds at checkout. Our approach to risk management is core to our business model, and has been proven to lead to low fraud rates, higher approval rates compared to traditional credit underwriting models, and low credit losses. Our models have been built on more than a billion data points, including data from over 7.5 million loans and over six years of repayments. Furthermore, our risk management models are designed to continuously improve over time, becoming more precise and efficient with each transaction powered by our platform. à Not sure I understand why they need risk management. Are they also used as a loan and financing platform?
  • Page 5 – Accurate credit pricing.   Our risk model consistently outperforms traditional credit models, enabling us to better help eligible consumers finance their purchases and power more transactions on our platform. à Affirm does do financing apparently. They seem to have their fingers on everything related to payments
• ​​We have already achieved significant scale, but we are just getting started. As of September 30, 2020, more than 6.2 million consumers have completed approximately 17.3 million transactions with over 6,500 merchants on our platform, leading to a total Gross Merchandise Volume, net of refunds (“GMV”) of approximately $10.7 billion transacted through our platform since July 1, 2016.
• Approximately 64% of loans facilitated through our platform during the fiscal year ended June 30, 2020 were taken out by repeat consumers, and our dollar-based merchant retention rate is above 100% across each cohort that joined our platform since 2016.
• Rapid growth of e-commerce
  • According to eMarketer, global online sales grew 20% to approximately $3.4 trillion in 2019 and are expected to grow to approximately $5.8 trillion by 2023; however, e-commerce still only accounts for 14% of total retail sales. à E-commerce will continue to grow for a number of years to come.
  • In the United States, according to the U.S. Department of Commerce, e-commerce sales as a percentage of total sales jumped from 11.8% to over 16.1% between the first and second calendar quarters of 2020.
• “Buy now pay later” market share expanding
  • 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. à I actually am not a fan of the ‘buy now, pay later’ idea personally and think this could be an issue someday if the economy ever faulters in a big way. But for now it’s the trend.
• Revenue sources
  • 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 the fiscal year ended June 30, 2020 and for the three months ended September 30, 2020, 0% APR financing represented 43% and 46%, respectively, of total 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.
•  

• Financials:
  • For the fiscal years ended June 30, 2019 and 2020, our revenue was approximately $264.4 million and $509.5 million, respectively, representing year-over-year growth of approximately 93%. à Serious revenue growth
  • For the three months ended September 30, 2019 and 2020, our revenue was approximately $87.9 million and $174.0 million, respectively, representing year-over-year growth of approximately 98%.
  • We incurred a net loss of $120.5 million and $112.6 million for the fiscal years ended June 30, 2019 and 2020, respectively.
  • We incurred a net loss of $30.8 million and $15.3 million for the three months ended September 30, 2019 and 2020, respectively. à Losses decelerating by almost 50% is good to see.
  • Operating margins were -48.2% in FYE 6/30/2019 and moved to -21.2% in FYE 6/30/2020 à Margins improving but still negative. Won’t matter in this market.

• Interesting comments:
  • Shopify is a 5% holder
  • Notably, 28% of FYE June 30, 2020’s revenues were from one merchant, Peloton (PTON). Peloton accounted for 30% for AFRM’s revenues in Q3 2020. (Link: https://seekingalpha.com/article/4397494-ipo-update-affirm-restarts-ipo-seeking-873-million)

• Peers/Competitors:
• Afterpay
• Zippay
• Visa (V)
• Sezzle
• PayPal (PYPL)
• Square (SQ)
• Latitude Financial Services
• Klarna
• Humm
• Openpay
• Misc: N/A

Conclusion – Affirm sounds like it has a lot of potential in the payment space for both consumers and merchants. E-commerce is growing and will continue to grow so the industry and TAM is there especially with Gen Z + Millennials being the majority of the demographic who would use AFRM. But the competition from the likes of SQ and PYPL and even last year’s IPO FOUR what is left of the pie? Can AFRM take market share away from these other players? I think time will tell on that. Revenue numbers will catch the eyes of traders but still in a losing position as a company. And can almost guarantee a hot open so what will be left for traders in the after market that actually look at the fundamentals? Not sure there. This one is a ‘play at own risk’ if it opens up hot but can obviously work given the momentum in this market. Personally, I would need to see some additional data points somewhere to make me comfortable paying up as I fully expect this to open closer to $100 than $50.