Bearish thoughts on Affirm

Investment Analysis Clubs Saul’s Investing Discussions
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Affirm has gotten several high profile deals lately, and if you invest based on the news, it would be a slam dunk buy. Their numbers, though, as Saul and others have pointed out…

https://discussion.fool.com/some-cautions-on-affirm-34933913.asp…
https://discussion.fool.com/affirm-weakness-in-core-revenue-3493…
https://discussion.fool.com/for-bnpl-holders-34934553.aspx
https://discussion.fool.com/affirm-34956008.aspx

…are not as clear.

For my part, the trouble is the story (hat tip to BroadwayDan) is not harmonious – it is incongruent. Affirm’s mission is “to deliver honest financial products that improve lives.” Their messaging seems to assert moral high ground over credit cards, but their solution to the credit crisis is…more credit? Does that make sense?

The moral argument

The fact is, I would implore friends and family NOT to use Affirm. Monthly bills residence, power, water, and cable/Netflix or whatever are typical for most folks, but I believe (and maybe this is just me) that the more monthly payments you have, the worse off you are. If you also have 2 car payments, student loans, etc…it gets very easy to have nothing left at the end of the month. I have seen this and I believe it to be a bad thing. Affirm’s business succeeds when there are more monthly payments. That’s what they do – with their BNPL product and even more so with their debit card product. I can’t see this as a good thing.

Fair question: How is Affirm different from Upstart? I see two big ways:

  1. Affirm has several sources of revenue (it really gets a little confusing), but the main and fastest-growing source is revenue from Interest. Upstart is paid a flat fee per origination, so they have no incentive to charge more than the “correct” rate, as best they can determine it. Affirm has the incentive to charge as high a rate as they can, and even if they resist it due to ethics or due to trying to grow volume, their risk explodes as much as revenue does.
  1. Affirm is all about turning purchases into payments. The more purchases/payments the better (for Affirm’s pocketbook). But as I said above, more payments are worse for consumers – the very ones whose lives Affirm wants “to improve!” Upstart is not directly influencing purchases – and I believe many of their loans aren’t going toward consumption at all, but paying down higher rate debt.

The business argument

I am not trying to get on my moral high horse. Ideology isn’t the only problem with credit. As everyone knows, a big problem is the risk that you won’t get paid back. So let’s say Affirm makes good on their altruistic promises like never charging late fees. Is that good for business? If they don’t charge high interest rates – do they ever turn a profit? Again, their pocketbook doesn’t seem aligned with their stated values.

Conclusion

I was already tempted to put this in the “too complicated” pile. But I feel there are more problems than just the hard to understand numbers. I don’t think people should use Affirm, and I think Affirm has serious risks that either keep them from being a profitable business, slow their growth, or maybe endanger their credit-worthiness long term.

These are just my thoughts – yours may differ. And it wouldn’t surprise me if Affirm bulls do really well in the short term. I won’t be among them, but you already guessed that.

Bear

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Bear,

I see your points but I have a different one regarding your moral argument.

I think what you are saying is that nobody should buy anything on time. But let’s face it, people do, 55% of Americans in fact carry a credit card balance so if they are going to do it, how should they do it?

Credit cards are usurous. We all know what they do - if you buy a cup of coffee a day and a sofa and can’t pay off the sofa, your interest is going to be on the coffee and the sofa and everything else you charge until you pay off the sofa, even if you pay off all the coffee on time.

Affirm is just attacking the credit cards, “unbundling” as they say the long term and the short term items, charging interest only on the long term items instead of all the items, and doing it at the point of sale with full transparency, unlike credit cards.

POS unbundling is huge, disruptive, and better for the consumer than credit cards. Maybe not better than all-cash, but next best thing. And it’s been around forever, but in a low tech way (furniture stores and mattress stores offer POS payment plans, and have for years.)

Affirm lets you easily and transparently see what you are paying for the item, whichever payment plan you choose. It is a good thing, not a bad thing. Pay off your coffee and put the sofa on time. People are freaking out because it’s new and they think it’s going to cause people to get out of control and it might, just like credit cards might but the basic concept is great because it’s throwing fire in the face of the usurous credit card companies.

There is a legitimate worry about keeping track of monthly bills when everything is at POS. I think that’s why Affirm may be offering this debit - plus card - which I think is pretty cool. Charge everything on one card, and select at the point of purchase what you want to pay over time. So interest is only charged on the couch, not the coffee, but everything comes into one place.

But if someone goes nuts with multiple BNPL providers, how is this different than someone going nuts with multiple credit cards? There will always be some people who get themselves into trouble with credit. And there are lots of people who don’t, why shouldn’t they have better choices?

I have to admit I didn’t drink that Kool-Aid until I actually saw the interface. For those who haven’t seen it, go to West Elm and pretend to buy a couch and choose Affirm. Or Home Depot or Lowes and buy an expensive tool.

Or don’t. I am not advocating purchasing AFRM shares. Clearly the wisest members of the board are bearish on this stock and I accept and respect that so much that I am not even going to tackle the other points. All my wise advisors in my paid services are bullish and I respect that too. What to do? So many people I respect, in disagreement. Probably best to move on to another stock that everyone can agree on. Or keep a small position and see how things unfold.

It’s going to be a dogfight with the BNPL providers, the banks issuing credit cards will have to enter it, no idea who will be the winner (wise paid advisors say Affirm), but in the end the consumer will win. And if that doesn’t happen, I will post a “I was wrong about BNPL being good for the consumer” message to the board. :-}

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I sort of agree with Mizzmonika. Choosing an investment based on what people “should” do is rather short-sighted, IMO. People abuse credit. People overspend. The truth is that people make poor financial decisions. Period. Always have… always will. That is hardly the fault of AFRM, or any other company.

In fact, I can’t see where the “morality” of this is relevant. Whatever happened to personal responsibility? The fact is BNPL has been around for a very long time, and it is the only way many people can buy what they need/aspire to have. The technology has changed over the decades, but the idea has been constant. Perhaps some on this board are a little… uh, judgmental???

Let the market sort out whether this is a bad investment or not. The financials are all we need, and we’ll know soon enough.

breezyday
tiny position in AFRM

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I think that what Bear is trying to say is that Affirm, and Affirm’s website illustrations, aren’t saying “get your financial life under control and reduce your debts,” they are saying “Take that vacation you can’t afford!” “Buy that Peloton you can’t afford!” “Buy that piece of expensive jewelry you can’t afford but always wanted!”

It has nothing to do with retiring credit card debt. It has to do with taking on more debt (but perhaps without the exorbitant interest of credit cards).

I’m not saying you shouldn’t buy the stock because of that, but don’t kid yourself that it means getting rid of credit card debt.

Just my opinion, hopefully with minimal if any moralizing.

Saul

47 Likes
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Moral investing is a very slippery slope. Let’s take UPST since it is also a company that makes money off of loans. The loans that they are giving out are personal loans. Yes they don’t actually make their money off the interest but they still make money off of loans. I know most of the people on this board do not take positions because of a “moral” position. But if you are going to take that position, than look at all of your positions in that light. Personally, I have objections with some companies but I stopped using my views to object to any company. I can understand why some people might not like this company do to all the competition but as far as “moral” positioning, I just don’t see it. I would much rather some person buy something on Afrm and pay it off than take out a credit card and pay 15% month after month for years.

Andy

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Just to give the thoughts of the CEO Max Levchin. I do not want to belabor the point but Afrm’s product does seem a much better way of giving out credit to their customers. Just go down the page till you get to the CEO’s Letter.

https://www.sec.gov/Archives/edgar/data/0001820953/000110465…

Andy

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I’m very familiar with the “buy now, pay later” concept.

Its called a loan. Thats how i paid my house, my TV, my glasses and my car.

In my experience, “buy now, pay later” works very well. It spreads out large expenses over a period of time.

In Denmark we have that option in most shops, delivered by companies that take that risk and enable people to buy stuff now, that they have not yet saved money for. Not enabling people who can’t afford it (credit scoring should deem those people unfit for such a loan). I expect that Affirm has to evaluate people using that option?? If not, then the risk is greater

Best regards

Martin

Frequent user or BNPL :wink:

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