I’d like to express some cautions about Affirm so that no one goes out and loads up the truck without having the whole picture. After reading the earnings press release and conference call and their investors presentation, I was ready to go out and take a small position, but then when I stopped to really think about it, the more I thought, the more questions I had:
First, Affirm carries a LARGE part of the loans on their own books, which adds enormous risk. This is not at all the clean picture we have with Upstart, which carries almost no loans on their own books.
Second, Affirm carries a large part of the loans on their own books, which ALSO makes them very capital intensive. This AGAIN is not at all the clean picture we have with Upstart. Affirm says that they are already funding 72% of their current dollar capacity.
Third where Upstart has concentration, Affirm has total concentration, Cross River Bank originates ALL their loans (according to jonwayne’s research).
Fourth, with Upstart we think about if they get one or two big banks things can really explode. They are at the beginning! But Affirm already has Shopify and Amazon, and they are already partly priced in. Where do you go from there?
Fifth, Affirm is complicated. They have 5 or 6 different ways they make money. They have set asides in case people default (as they did with $32 million last year for covid), and then when they put the set aside back they count it as revenue and income, which makes comparisons complicated. Trying to understand what their true adjusted revenue and income was last quarter was almost impossible. [This also harks back to point one, that they were on the hook for all those possible defaults if they had occurred].
Sixth, Another risk is that in case of a big recession, their revenue would fall off a cliff!
Seventh, If BNPL is so profitable, and so open to wild growth, why did Afterpay, the global category leader for BNPL, just agree to be acquired by Square??? Did they start to see evidence of a major slowdown in the field, or saturation?
On the positive side: They have signed Shopify and Amazon but aren’t getting revenue from them yet. This could become huge! Other merchants may have to sign on with somebody for BNPL to be competitive. (But where would Affirm get the capital to undertake all these customers?)
Conclusion: I will probably end up taking a small position, but nothing like my position in Upstart which is 20+%. Chris has kept his position at 4%, jonwayne at under 2%. I would probably stay under 2% too, but I might instead just add more to Lightspeed after listening to that podcast.