Affirm Q3 earnings

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Market seems to like what Affirm just reported. Stock is up +30% after hours as I write this.

  • Revenue +55%YOY
  • GMV +84%YOY
  • Active merchants 102,000 (vs. 6,500 in Q3’20)
  • Active customers 8.7m (+124%YOY)
  • Transactions/customer 2.3 (+8%YOY)
  • Expands Amazon relationship
  • Payment option in Amazon Pay wallet (US)
  • FY revenue guidance ~+42%YOY

Helps take some of the sting away from today’s UPST action, but I’m a long term investor, and have decided to hold on to my UPST shares. I’ll contribute a more in depth analysis on Affirm later.

-Ron
Long AFRM

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Per CNBC, AFRM will be the official/exclusive BNPL partner for Amazon (VERY good news) thru 2023, and is going to be integrated into Amazon Digital Wallet thru 2023 as well. AMZN is getting some various warrants from AFRM as part of the deal. Said Shopify partnership has helped the increase over 100,000 merchants on their platforms (as was also reported here IIRC). Very good report after a large drop today, but I was just as interested in AMZN now having stakes in Affirm and Rivian.

R4M (long AFRM ~2%)

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I’ve negotiated OEM deals with Amazon, and it’s worth nothing that this sort of deal comes with significant risk. Amazon’s standard strategy is to bring on third-party providers to do a quick, low-risk integration. This allows Amazon to see measure how profitable the product is, and understand all the moving parts and hidden complexities.

Then, if the product is successful and profitable, they will take the functionality in-house, freezing out the partner.

So, the most likely 2-3 years outcomes are that a) Affirm’s deal with Amazon loses money or breaks even, or b) Amazon learns what it needs to from Affirm, and then ditches them. An unlikely outcome would be Affirm getting a bunch of profitable Amazon business and continuing to work with Amazon over the long term.

The key to actually having a profitable business relationship with Amazon is complexity that Amazon is unable to duplicate. It’s up to the investor to judge whether Affirm has that.

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The key to actually having a profitable business relationship with Amazon is complexity that Amazon is unable to duplicate. It’s up to the investor to judge whether Affirm has that.

Oh they have that in spades. Afrm’s CEO is no slouch and if you are going to judge a company, judge it on it’s founder and CEO Max Levchin. He has already co-founded Paypal, so I am sure he understands Amazon explicitly and understands exactly what he is doing.

Andy

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Great earnings report, but I don’t get the guidance:

Q1 ‘22 $269M / 23% QoQ / 71% YoY – actual
Q2 ’22 $325M / 21% QoQ / 72% YoY – Guide
Full Year 2022 guide 1,238M

With full year guidance of 1.238B, the math comes out as --0-- growth Q3 and Q4 per the reported guidance. Can’t find an explanation for this in the earnings transcript (?) I’m a bit flumoxed.
– John

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Hi,

The active number of merchants have increased 15 times (1569%) but revenue has just increased 55 percent. That could be because new merchants have just started using Affirm and have not manfully contributed to the revenue. however, the average customer makes 2.3 transactions which has just increased 8 percent. why the customers do not repeat transactions? are they not happy with the service?

on the other hand, After pay’s, another BNPL provider, revenue for North America has increased 146%.
transactions per customer for Affirm is 2.3(+8%YOY). The active customers of afterpay makes 17 transaction and it has increased 40 % YOY, this shows that customer satisfaction is low.

I know the business model is some how bit different but they are in the same industry and their products are similar. just my 2cents!

kind regards,

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Just to add a few thoughts to this thread:’

What a great quarter for Affirm!

  1. Regarding the weird revenue guide - I think it is probably taking into account a big drop in revenue Q3 as shopping is highly seasonal. Hopefully we will see better than those numbers as things ramp up.

  2. Regarding Amazon using Affirm only until they can copy them, it’s definitely a possibility. It’s also a possibility that Affirm has given Amazon a cut of the revenues or some monetary benefit such that it’s worth it for them to stay together. Affirm does have AI similar to Upstart, lower level but supposedly predictive, so if it is impacting the risk, this would be hard to duplicate, and if Affirm’s adaptive checkout increases sales better than Amazon can and Amazon takes a huge cut of those sales anyway, then they may stay together for a long time, although I doubt exclusively.

In any case, Affirm now has a year to get its brand name in front of all Amazon customers. Breaking up with Amazon will certainly crash the stock, but let’s see what Max & Company do in the year they have to build their brand. Market the Affirm debit card to every customer? That would be interesting. Why would the Amazon merchants who have already agreed to accepting Affirm change their mind if it’s no longer an option in the cart? They can still support the Affirm debit card.

  1. Regarding Afterpay transactions vs. Affirm, and the difference in the number. That’s easy. This may have changed because it’s hard to keep up with this space, but Afterpay primarily does pay-in-4 zero interest loans. Affirm has been a latecomer to this pay-in-4 space, financing the larger loans instead (Peleton, plane tickets.). So if you think about how often you buy a shirt vs. a plane ticket or a peleton, you will have your answer on the difference in the number of transactions. I expect this to change now that Affirm has pay in 4 zero loans and if it doesn’t that will be a red flag for me. Clearly Afterpay is killing it! But you can’t compare the two on this one yet.

As I have said in previous emails, it is going to be a dogfight with all the banks that issue credit cards jumping in, and it’s totally unclear how things will play out. But you can’t deny Affirm is executing, so I’ll stay as long as they do. There will be multiple winners, and I don’t believe the banks defending their turf will succeed in stomping out the major BNPL players. But we’ll see.

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In regards to the Amazon deal. Here are the details from the linked SEC forms documenting the deal.

On November 10, 2021, in connection with the entry into the Commercial Agreement by Amazon Services and Amazon Payments, the Company issued to Amazon Services: (i) a warrant (the “First Warrant”) to purchase up to an aggregate of 7,000,000 shares of Class A common stock, $0.00001 par value per share (“Class A common stock”), of the Company (the “First Warrant Shares”) at an exercise price of $0.01 per share; and (ii) a warrant (the “Second Warrant” and, together with the First Warrant, the “Warrants”) to purchase up to an aggregate of 15,000,000 shares of Class A common stock (the “Second Warrant Shares” and, together with the First Warrant Shares, the “Warrant Shares”) at an exercise price of $100.00 per share.

https://investors.affirm.com/static-files/9463e73f-c280-4621…

So Amazon acquired 22M shares of Affirm in stock warrants, 7M at $.01 and 15M at $100. Some may call that buying revenue because of the delta between the warrants and the stock price, but I see it differently. In that Amazon is buying a stake in AFRM to the tune of 22M shares at a cost of whatever the revenue AFRM gains by gaining access to 40% of the worlds e-commerce GMV(or at least the US portion of that).

They have a similar deal with Shopify for the same purpose although I’m not sure of the details for the share warrants but they take about a $16M expense in S&M for “Shopify Warrants” each of the last few quarters. You can see that under financial statements at the bottom of the investor presentation here.

https://investors.affirm.com/static-files/4c9ae5a2-3b35-4aca…

So the two e-commerce behemoths are now firmly vested in Affirm’s success. They must see something they like both to provide their customer’s the product as well as invest in the company.

On the question of Affirm vs Afterpay. They have historically different audiences. Affirm last year was a Peleton story but that has changed and will be less relevant even more. The size and market of the two companies (plus Klarna) as of the previous quarter is summarized in a chart found here.

https://pbs.twimg.com/media/FBqKvWrWUAoIDhk.jpg

AFRM
-S8.2B in GMV (FY 2021);
-$870M in Revenue (FY 2021)

Afterpay
-~15.5B in GMV (FY 2021);
-$680M in Revenue (FY 2021)

avg transaction value
AFRM - ~$495 (FQ4 2021)
After - ~$150 (FY 2020)

And now with Affirm adding 73k (3.5x) merchants in one quarter it’s hard to compare those. It’s too big of a hyper growth.

As we said they have a Peleton problem that is less relevant moving forward. GMV was up 84% but excluding Peleton is up 138%. And that should accelerate based on guidance as well as revenue. Their already great looking guidance includes no impact from the Amazon deal. So…

That’s all the time I have for now but I find AFRM very interesting as a disruptor. I have some thoughts on the ecosystem they are building too, but am still researching it first.

Cheers,

Darth
Long AFRM

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Just a note, I sold half of AFRM stake based on this report this morning. There is just too much excitement for a company that is not growing fast enough to justify it. I have been a believer in AFRM for a while but thought that the customer adoption and transaction numbers were weak.

  • Active customers 8.7m (+124%YOY)

They only added 1.6 m QoQ. At this rate, they will barely have 17 M at the end of 2022. I wanted to see them at 25 M or more by 2023. For comparison, Amex has 50 M active US customers and is valued at a much much lower multiple. Remember this is not Saas. They need to keep growing and keep customers active to justify the high multiple they have.

  • Transactions/customer 2.3 (+8%YOY)

I thought this was weak as well. It barely moved. While the card might accelerate it, it just isn’t moving fast enough. The crossing selling between merchants might pick up? But when?

While I think AFRM is a great company that is truly innovating, I wonder if all the value is priced in? Yes, there are catalysts, but how much more can they accelerate from where they are at? I just don’t know if it’s the hypergrowth company that people want it to be.

  • Active merchants 102,000 (vs. 6,500 in Q3’20)

The merchant onboarding was a bright spot, but those are all tiny SMBs. The transaction volume is clearly low for them as well as the GMV. Yes, the holiday will be a blowout. But we all know this. And in Q1 they will fall off a cliff just like most of retail. There is a reason they call it Black Friday, it’s the only time they get to black.

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The key to actually having a profitable business relationship with Amazon is complexity that Amazon is unable to duplicate. It’s up to the investor to judge whether Affirm has that.

Oh they have that in spades. Afrm’s CEO is no slouch and if you are going to judge a company, judge it on it’s founder and CEO Max Levchin. He has already co-founded Paypal, so I am sure he understands Amazon explicitly and understands exactly what he is doing.

Cool–if you think they have it in spades, could you share what you think their secret sauce that Amazon can’t duplicate is? I think that would be pretty helpful to understanding the company better.

Thanks!

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