Affirm (NASDAQ: AFRM) - American service of payments by installments. The company's business seems to have prospects, but all the positive is already, seems to be, is embedded in the extremely high price of these shares.
What do they make money on
There was a sad joke about that, that the company does not make money, but only 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 did not 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 buzzword fool you.: BNPL is an installment plan.
Some write about the differences between this model and the classic installment plan., but i don't see any difference. BNPLs differ from installments in the same, than lunch boxes from food boxes, - nothing, it is the same.
Affirm's ingenious business idea is, to take a commission from merchants for selling goods on the Affirm platform, and also collect interest from clients, if they have not approved an installment plan at 0% per annum. Affirm does not issue loans for installment plans from its own money, and through the banks affiliated with it.
It is assumed, that when deciding to sell a product in installments, Affirm software evaluates a bunch of customer parameters, before he gets approved by installments. The terms of the installment plan vary greatly and depend both on the specific product., and from the seller and customer data. The term can be from 6 weeks before 60 months, and the interest rate varies from 0 to 30% annual.
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 clients - but the "installment plan" is used as an advertising gimmick to attract client masses.
The most significant difference between Affirm and other credit institutions is, that Affirm users pay a simple percentage - a percentage of the purchase price, not complicated, when in the future interest is paid on the already existing amount of debt, taking into account interest. Affirm also does not charge users for late fees..
According to the company's annual report, its revenue is divided into five segments:
- Merchant fees - 44%. Affirm commission for, that the merchant was presented with a happy opportunity to sell their 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 by installment programs.
- Interest income - 37%. Loan proceeds, issued to clients.
- Sale of client debt to third-party investors - 10%.
- Loan service - 3%. Then, 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 of the loans and installments, the company issues for cosmetics, furniture and other small purchases.
The company's revenue by country is distributed as follows: 98,47% falls on the USA, but 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 installments in the United States in particular and in the West in general is mainly due to the fact, that the consumer paradise is gradually collapsing there: it's getting more expensive to live. Corona crisis is here, sure, 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 help manufacturers of consumer goods: to get a credit card in the USA you need a credit rating, and it does not have it in the USA 53 million adults.
To buy a product in installments, no credit rating 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 is Nubank doing in Latin America: gives access to credit topics, 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 on loans 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.
Which means, the audience needs to be expanded - at least by installments. However, installment services are 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 this will not affect the credit rating, which the consumer needs for loans for larger amounts - for a business or a mortgage.
So the popularity of installments in the West will continue to grow.
Season. Judging by the latest data from the United States - an increase in applications for a credit card and consumer plans to use installments, the coming season of Americans' holiday spending could have a positive effect on Affirm's revenue.
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 the business. Stores receive money for the goods immediately, but Affirm and its banking partners receive money in parts.
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 Amazon American customers..
So far, installments in the USA are not very common - and therefore Affirm, due to the effect of novelty, can count on, that for some time her business will maintain high growth rates due to the connection of more and more merchants to the Affirm platform, while American retail is experimenting with a new payment option.
Just look at these numbers. Befitting a loss-making IT start-up, Affirm, due to the lack of real achievements in the field of profitability, shows investors a lot of beautiful and meaningless information with numbers: growth of 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 the quotes Affirm, it works well: at the beginning of the IPO in January 2021, Affirm shares were worth 49 $ - and in December they are already 107 $. Considering, 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 plan application and not even the most popular.. It will be very bad for her business., in which, let's face it, not much room to increase the margin.
Almost a loan, only in installments. The terms and conditions of the company are very similar to those of credit cards., although the conditions are a little easier, but not for everyone, as we managed to 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 powerful 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 as it seems to me, such a wild overestimation against the background of unprofitableness almost completely excludes the possibility of buying the company by someone - an extremely desirable outcome for the majority of unprofitable IT firms.
Concentration. Significant, but it is not known exactly what proportion of the processed Affirm payments go through one bank - Cross River Bank. The troubles of this bank or simply a renegotiation of the relationship between them can negatively affect Affirm.
"Why is it necessary to 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 at a price, total, about 1 billion dollars - while, that these shares have a market value of about 2.1 billion. At the moment, Affirm's capitalization is $ 30 billion - so the effect of the execution of these orders will be tangible.
May be, Amazon and will not execute all of 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 tangible drop in stocks.
Ruling class. The company has two classes of shares - A and B. Holders of B-shares have more voting rights, than holders of A-shares. 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 of Affirm's management to the detriment of minority shareholders.
Competitors from where did not expect. The form of mobile applications for banking products is gaining popularity in the West. If the installment plan shows its economic viability - and Affirm shareholders really hope for it, big banks can make the same offers in their apps and market them through their huge retail network. If it doesn't kill Affirm, it will severely limit her 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 that will hit Affirm hard.
Affirm is too speculative an idea even by my standards.. As for me, these shares have a red price 70 $. what, however, does not cancel that, that its shares can rise even in such conditions: investors are often irrational and inconsistent. So you can invest here - but only at your own peril and risk..