Affirm (NASDAQ: AFRM) — American installment payment service. The company's business seems to have prospects, but all the positive, seems to be, embedded in the extremely high price of these shares.
What do they earn
There was a sad joke about that, the company is not making money, but just pretending, what does it do: she is hopelessly unprofitable.
As for the official occupation of the company, then this is an installment payment service. In the West, for some reason, they didn’t come up with the word “installment plan” - there is only a clumsy installment plan ("payment in installments") and for some reason they use the phrase buy now - pay later ("buy now, pay later"), as well as the abbreviation BNPL derived from it. But don't let the buzzwords fool you.: BNPL is the installment plan.
Some write about the differences between this model and the classic installment plan, but I don't see any difference. BNPL differ from installments in the same way, than lunch boxes from food boxes, - nothing, it is the same.
Affirm's brilliant business idea is, to take a commission from merchants for the sale of goods on the Affirm platform, and collect interest from customers, if they are not approved by installments at 0% per annum. Affirm does not issue installment loans from its own money, and through affiliated banks.
Supposed, that when deciding to sell a product in installments, Affirm software evaluates a bunch of buyer parameters, before he gets approved by installments. Installment terms vary greatly and depend both on the specific product, and from the seller and buyer data. The term can be from 6 weeks before 60 Months, and the interest rate varies from 0 to 30% per annum.
In the last quarter only 43% transactions on the company's platform were interest-free - the rest 57% were with interest payments. When studying a company's business, one gets the impression, that the company is engaged in credit card business, because a significant part of the money there is still earned by issuing, in fact, credit loans to customers - but the "installment plan" is used as an advertising ploy to attract client masses.
The most significant difference between Affirm and other credit institutions is that, that Affirm users pay a simple percentage - a percentage of the purchase price, not complex, when in the future interest is paid on the amount already owed, taking into account interest. Affirm also doesn't charge late fees from users..
According to the company's annual report, its revenue is divided into five segments:
- Fees from merchants - 44%. Affirm commission for, that the merchant was gifted with the happy opportunity to sell his goods in installments on the Affirm platform. The amount of commissions is different for different companies.
- Virtual card network - 6%. Debit cards of Affirm itself, which the company's customers can use when making payments in regular stores, not under installment plans.
- Interest income — 37%. Loan proceeds, issued to clients.
- Sale of client debt to third-party investors — 10%.
- Loan servicing - 3%. That, what Affirm earns, collecting loan payments for third party companies.
The maximum loan amount for Affirm is 17 500 $, which is not very much: a new car in the USA costs on average 41 000 $. Therefore, in the bulk, the company issues loans and installments for cosmetics., furniture and other small purchases.
The company's revenue by country is distributed as follows: 98,47% belongs to the USA, and 1,53% - to Canada. The company recently launched a business in Australia.
Arguments in favor of the company
It seems promising. The growing popularity of installment plans in the United States in particular and in the West in general is due mainly to the fact, that the consumer paradise is gradually collapsing there: it's getting more expensive to live. Corona crisis is here, certainly, added complexity, but in general it was not easy without him. And this significantly slows down the growth of mass consumption and limits it.. The ever-growing debt burden of Americans here cannot be of help to manufacturers of consumer goods: you need a credit score to get a credit card in the usa, and it does not have it in the USA 53 million adults.
To buy goods in installments, no credit score needed, although the terms of the installment plan will be worse, if there is no credit rating. In fact Affirm is doing the same in the US and developed countries., what Nubank does in Latin America: gives access to credit to those, to whom the traditional banking system would not issue a loan.
Before that, installments in the West were unpopular for the simple reason, that the economy of a consumer society made do with the available resources: credit cards with moderate interest rates and long interest-free periods. But now this is not enough - the existing audience is not actively increasing consumption, exhausted under the weight of the existing debt burden: student debt, mortgage, car loan.
So,, the audience needs to be expanded - at least by installments. However, Installment services are also actively used by people with a credit rating: installment services for the most part are not taken into account in the credit history, what attracts users. After all, according to this scheme, you can buy a sofa on credit through Affirm and even delay payment, but it won't affect your credit score, which the consumer needs to borrow for larger amounts - for a business or mortgage.
So the popularity of installment plans in the West will continue to grow..
Season. Based on the latest data from the US - the growth of applications for a credit card and consumers' plans to use installment plans, Americans' upcoming holiday spending season could benefit tops Affirm.
test test. Installment is also gaining popularity in American retail. And all because, that Affirm and others like it, in principle, allow stores to increase sales without much damage to business. Stores receive money for goods immediately, but Affirm and its banking partners receive money in installments.
Among the partners of the company appeared Amazon - now payment for goods in installments through Affirm will be available for all Amazon goods with a value of 50 $. This will be the only installment payment option for US Amazon customers..
So far, installment plans in the US are not very common - and therefore Affirm, due to the novelty effect, can count on, that for some time her business will maintain high growth rates due to the connection of an increasing number of merchants to the Affirm platform, while US retail is experimenting with a new payment option.
Just look at these numbers. As befits loss-making IT startups, Affirm, due to the lack of real achievements in the field of profitability, shows investors a lot of beautiful and meaningless information with numbers: increase in purchases by X% per year, number of active users, customer satisfaction and other beautiful reporting.
All this math should cover up the chronic unprofitability of this business.. AND, judging by Affirm quotes, it works well: at the beginning of the IPO in January 2021, Affirm shares were worth 49 $ - and in December they are already 107 $. And given the, that for some time the company will be able to show good growth rates of these indicators, investors will continue to "peck" on this - and the growth of quotations will continue.
What can get in the way
They are not alone here.. Affirm is far from the only installment app and not even the most popular.. This will be very bad for her business., wherein, frankly,, not much room to increase the margin.
Almost a loan, only in installments. The conditions of the company are very similar to credit cards, although the conditions are a little easier, but not for everyone, how did we make sure. There is a good chance, that when the mass consumer “tastes” the installment plan and understands, what, in fact, this is the same loan, strong growth in this area will stop. And if Affirm stops showing strong growth, her quotes will suffer.
Price. Now P / S of the company is above 30 while, that she is unprofitable. So volatility will accompany these stocks like, how Hugin and Munin accompany Odin.
And it seems to me, such a wild overvaluation against the background of unprofitability almost completely excludes the possibility of someone buying the company - an extremely desirable outcome for most unprofitable IT offices.
Concentration. Significant, but it is not known exactly what share of payments processed by Affirm goes through one bank - Cross River Bank. The troubles of this bank or just a review of relations between them may negatively affect Affirm.
"Well, why must you be a fool". The company received a partnership with Amazon for, that Amazon gave orders to buy its shares at a fixed price: 7 million shares of Affirm, the e-commerce giant can buy at a price 1 cent for pike, and another 15 million - at a price 100 $, now Affirm shares are 126 $.
In this way, Amazon will be able to buy Affirm shares for a price, total, about $1 billion, that these shares have a market value of about 2.1 billion. At the moment, the capitalization of Affirm is $30 billion, so the effect of the execution of these orders will be tangible.
May be, Amazon will not fill all these orders at once, which could severely drop these shares, so that in the long run, the negative effect of such a deal will not be very noticeable - Affirm shares will grow more slowly, what investors would like. Maybe, Amazon uses its orders immediately, which will lead to a significant drop in stocks.
Ruling class. The company has two classes of shares - A and B. B-share holders have more voting rights, than A-share holders. As you know, this is done for, so that the founders of the company continue to control this business. They control - and conflicts between them and minority investors are possible. For example, the story with Amazon is an example of such decisions by Affirm management to the detriment of minority shareholders.
Competitors from where they did not expect. In the West, the form of mobile applications for banking products is gaining popularity. If the installment plan shows its economic viability - and Affirm shareholders really hope for this, big banks can make the same offers in their apps and promote them through their huge network of retail partners. This is if it does not kill Affirm, that severely limits its growth..
Not only banks can become competitors of the company, but also the largest of its partners. For example, analyzing the results of working with Affirm, Amazon may well launch a competing service - and it will hit Affirm hard.
Resume
Affirm is too speculative even by my standards. As for me, these shares have a red price 70 $. What, however, does not negate the, that its shares can grow even in such conditions: investors are often irrational and inconsistent. So you can invest here - but only at your own peril and risk..
