Thoughts on AFRM

This Thursday is a big day with earnings reports from NET and DDOG, and also AFRM. I understand that AFRM is unlikely to be a board favourite because (1) it is not SaaS, and (2) fintech enterprises have been a problematic bunch recently, think LSPD and UPST.

Nevertheless I wanted to gather some thoughts on AFRM ahead of earnings, and hopefully collect some feedback from the board. AFRM reported a great Q1 2022 (period ending Sep 2021) with growth in revenue and GMV partly driven by the new “partnership with Shopify [that] is showing really strong signs of scale and impact” as per CEO Max Levchin. The 2022 Q2 numbers below are the guides provided on the most recent ER call. Although they are guiding for an acceleration of 33% QoQ in GMV and 21% in QoQ revenue, these numbers specifically exclude any sales and revenue from the Amazon partnership which “should be live in this holiday season”.

GMV $M	 Q1 	 Q2 	 Q3 	 Q4 		 YOY 					 QoQ 			
2020	 861 	 1,342 	 1,232 	 1,203 								56%	-8%	-2%
2021	 1,476 	 2,075 	 2,257 	 2,484 		71%	55%	83%	106%		23%	41%	9%	10%
2022	 2,713 	 3,600 				84%	73%				9%	33%		

Revenue $M						  					  			
2020	 88 	 130 	 138 	 153 								48%	6%	11%
2021	 174 	 204 	 231 	 262 		98%	57%	67%	71%		14%	17%	13%	13%
2022	 269 	 325 				55%	59%				3%	21%		

AFRM are guiding for the highest QoQ Rev growth in 2 years which seems achievable with a backdrop of huge distribution partnerships ramping up and in the context of a holiday quarter. I am rather looking forward to the possibility of a great Q2 report from AFRM - any contribution from Amazon would be an upside ‘surprise’ contributing to a beat of the Q2 guide. Max also provided an update on other merchant partnerships besides Shopify, Target & Amazon – “we continued to close, launch and expand our enterprise partnerships, broadening our network reach. We launched American Airlines and Apple Canada; re-signed three-year deals with Priceline and Signet; launched a deeper integration with Target, which more than doubled our current Target business; and closed brand-new partnerships with Newegg and Michaels.”

He also indicated that growth was strong from current partnerships: - “Excluding our largest merchant, our GMV with merchants that have been on Affirm’s platform for 12 months or longer grew 70% - this is akin to Recurring Revenue which seems to be growing at a healthy clip.

The Q3 Guidance will most likely get a boost from:

  • The Affirm Debit card scheduled to be launched in the new year (it is already in beta with 500k customers);
  • A full Q of Amazon distribution;
  • Further scaling of the Shopify partnership.

The dark clouds hovering around the favourable news noted above would probably include:

  • the risk of a rapidly decelerating economy; and
  • potentially a further acceleration of losses- Adjusted operating loss was $45 million in 2022 Q1, compared to an $8 million loss in the prior year;
  • strong competition.

Affirm’s main competition is twofold. Klarna, a BNPL giant with 90M active consumers and > 250k merchants. Klarna has an enviable stable of merchant brands and is backed by investors such as Sequoia Capital, Silver Lake, Visa, Ant Group, etc. The second largest BNPL player is Afterpay (SQ) an increasingly powerful incumbent which is very strategically embedded between Square’s ecosystem of merchants and consumers. Following their latest partnership deals, AFRM now have “integrated relationships with partners representing approximately 60% of U.S. e-commerce” so I believe there is good reason to be optimistic for further high growth.

One potential negative that stood out to me was the continued reduction in AOV (av. order value) from +11% in 2021 Q1 to -5% to -8% to -26% to -39% in Q1. I guess some of this can be explained by the lower proportion of expensive PTON bikes

I am long AFRM and feeling positive about their growth trajectory and the positive overtones on their last call also when discussing their capital requirements. Seems like the stock is enjoying a nice pop the past few days which seems to be a well deserved re-rating. At the same time I am wondering whether I am just being slow in learning the lessons on holding fintech stocks, particularly as we may be entering a recessionary cycle! Anyone have similar or opposing thoughts?


One potential negative that stood out to me was the continued reduction in AOV (av. order value) from +11% in 2021 Q1 to -5% to -8% to -26% to -39% in Q1. I guess some of this can be explained by the lower proportion of expensive PTON bikes

AOV has also gone down as they onboarded 90,000+ Shopify merchants. Many of them are small e-commerce sites, with limited offerings and low price points. Part of Affirm’s value prop to them was the ability to offer microloan amounts that a standard credit card can’t support. I would consider this a positivity as I think Affrm’s goal right now is to gain as many active customers as possible and use its ecosystem to drive repeat purchases.

24% of purchases with Affirm were sourced from the Affirm network as of the last report. Active customers is the number that I want to see go up significantly in the next ER. Other metrics are very hard to estimate right now given how much the business is in flux with new partners and holiday sales.