Affirm, a leading financial technology company that enables consumers to buy goods online and pay later, filed for a $100M IPO which Morgan Stanley is leading. The $100M figure is a placeholder and will surely rise dramatically before the company starts trading. Affirm is led by CEO Max Levchin, who was a co-founder of PayPal. Levchin holds the majority of the company's Class B stock, which is entitled to 15 votes per share. The company plans to trade on the Nasdaq Global Select Market under the ticker "AFRM" and plans to start trading before Christmas. They will likely price and start trading the week of December 14th. Given this past week or so was the final week to file publicly to trade in 2020, there has been a wave of S-1's revealed, including DoorDash, Airbnb, Roblox* and C3.ai.
Affirm's mission is to "deliver honest financial products that improve lives" and is a core piece of the modern e-commerce infrastructure stack. As e-commerce grows as a percentage of consumer spending, which has gotten a huge bump due to COVID, Affirm has become only more important. The "buy now pay later" space has seen a massive surge due to the growth in e-commerce; Afterpay (APT.AX) is up almost 700% from their lows in March-2020 and Shopify (NYSE:SHOP) is up almost 180% from the same time period. Affirm, by the way, inked a large partnership with Shopify earlier this year (more detail below). Affirm is re-imagining the pitfalls of legacy payment options which can be harmful and deceptive to consumers, unsuited for e-commerce, and difficult for merchants to integrate and use. Affirm has three main pillars -- a point-of-sale (POS) solution for consumers, merchant commerce solutions and a consumer-focused app. Consumer trust is paramount to Affirm's success and the company states they provide both true 0% APR payment options and interest-bearing loans, only charge simple interest (no compounding), and does not charge consumers for missed payments.
Affirm's strategy is working well; since July-2016 --> September 30, 2020, more than 6.2M consumers have completed ~17.3M transactions across 6,500 merchants which accounted for ~$10.7B of total GMV (Gross Merchandise Volume). Moreover, during their last fiscal year, 64% of the loans were from repeat customers and their dollar-based merchant retention rate is above 100% across each cohort that joined the platform since 2016. Revenue for the 3 months ended September 2020 was $174M, up 98% year-over-year and the company did $509.5M of total revenue in FY'20 (ending June 30), which was up 93% YoY. Affirm is headquartered in San Francisco, CA, and had 916 full-time-employees (FTEs) as of Sep-2020. Affirm was founded in 2012 and has raised $1.6B of equity and debt over the life of the company (more in the ownership section below).
Affirm started their business with the core “buy now pay later” product and has since expanded the product suite (screenshot below). Affirm brings a unique strategy to the market. When using their products, consumers never pay more than the stated amount and there are no other charges. Many financial products have hidden charges buried in fine print, penalties for pre-payments, or other additional fees. Consumers using Affirm are never charged deferred or compounding interest, late fees, or penalties on the loans, thus Affirm is not incentivized to profit from consumers’ mistakes or misfortunes. There are also significant benefits for merchants -- they can more efficiently promote and sell products, optimize customer acquisition spend, and drive incremental sales. Affirm also offers merchants valuable product-level data and insights to help better inform marketing strategies. Affirm cites stats that show that merchants using Affirm see 20% more approvals, up to 92% higher AOVs, and more repeat purchase rates. The company also has built-in advanced fraud controls into their products and has declined hundreds of thousands of applications due to suspected fraud every month over the past quarter. The Affirm platform addresses three main elements -- a point of sales solutions for consumers, merchant commerce solutions, and a consumer-focused application. More detail on their products is below:
Summary Metrics and GTM (Go-to-Market)
Affirm serves both consumers and merchants and generates revenue from each -- Affirm cites how their business model is aligned with the interests of both consumers and merchants. On the revenue sources, the company earns a fee when they help convert sales and power a payment. These fees depend on the individual arrangement and vary on the type of offering. For example, Affirm generates a higher fee on 0% APR financing products (Peloton is an example of this). 46% of total GMV facilitated through the platform last quarter was represented by 0% APR transactions. On the consumer side, Affirm earns interest income on the simple interest loans from originating bank partners. The company also earns interchange revenue from consumers using virtual cards, gains (or losses) on sales of loans, and servicing income (a flow of funds chart is below). Merchant network revenue is over 50% of total revenue followed by interest income revenue, which is ~30% (both as of the last quarter). Contracts with merchant partners have terms that range from 12-36 months. Affirm has over 6,500 merchants on the platform and 6.2M consumers have completed 17.3M transactions worth ~$10.7B of GMV. 64% of loans during the past year were from repeat customers and their dollar-based merchant retention rate -- which similar to what a SaaS company would disclose around their customers -- was over 100% for every cohort since 2016. Moreover, the company had an NPS score of 78 for the second half of FY'20. In terms of loan length, loans with a term length greater than 12 months accounted for 40% of GMV last quarter, compared with 24% a year ago. The company can process thousands of loan applications per minute. Overall, it's clear the product is very sticky and does drive network effects (Affirm disclosed a graphic on this which is below). Affirm does have a very concentrated customer base. The top ten merchants produced 35% of total revenue for FY'20 and 37% of total revenue for the past quarter. Much of this is driven by Peloton, which produced 30% of total revenue last quarter. 90% of Affirm's total GMV was processed online last quarter. Affirm illustrates their business model in the output below.
Affirm's market has no doubt seen a huge benefit from COVID and the rapid acceleration to e-commerce. While e-commerce was growing as a percentage of total commerce, COVID accelerated this move. According to eMarketer, global online sales grew 20% to ~$3.4T in 2019 and are expected to grow to ~$5.8T by 2023 and still only represents 14% of total retail sales. According to the U.S. Department of Commerce, e-commerce sales as a percentage of total sales went from 11.8% to over 16.1% between the first and second quarters of 2020, which was largely driven by COVID. Moreover, in North America, “buy now pay later” market share is expected to triple to 3% of the e-commerce payments market by 2023. In other regions, such as EMEA, “buy now pay later” already accounts for almost 6% of the e-commerce payment market, and is expected to grow to almost 10% by 2023. Not only does Affirm believe they can continue to address the move to e-commerce, but they can also address a portion of the ~$1T of customer acquisition spend by merchants in the United States.
As with any large market, the buy-now-pay-later space is highly competitive. Affirm competes in a few areas 1) primary competition are legacy payment methods such as credit and debit cards, including those provided by Synchrony, J.P. Morgan Chase, Citibank, Bank of America, Capital One, and American Express 2) technology solutions provided by payment companies such as Visa and MasterCard 3) mobile wallets such as PayPal 4) and other pay-over-time solutions offered by companies such as Afterpay and Klarna.
Investors and Ownership
Affirm has raised a significant amount of equity and debt. According to Pitchbook, Affirm has raised $1.61B in equity across many rounds of funding. Investors include Durable Capital, Thrive, Spark Capital, Wellington, Founders Fund, Andreessen Horowitz, Lightspeed, Khosla, Ribbit Capital, Battery, GGV, and Shopify. 5%+ pre-offering institutional investor shareholders include GIC (10.5%), Lightspeed (8.9%), Founders Fund (8.1%), and Khosla (6.6%). CEO and Founder, Max Levchin, owns a 13.1% stake. Max Levchin is a key employee to the company and the company disclosed in the S-1 that the board determined to provide almost 100% of Levchin's total compensation in equity incentives. Over the next 10 years, Levchin can be granted up to 12.5M Class A shares depending on various stock price hurdles. Earlier this year Affirm struck a deal with Shopify to power Shop Pay Installments, which was a huge win for the company. Shopify was offered warrants (at a penny apiece) as a part of that deal and could own up to ~10% of the company assuming full exercise of all warrants. Affirm most recently raised a Series G round at $19.93/share led by GIC and Durable Capital.
An output of the cap table ownership and per series prices is below.
Preferred Financing Round Prices
Financials and Other Metrics Outputs
Affirm is growing rapidly at a large scale, particularly on the merchant network revenue which made up 54% of revenue last quarter. Overall, COVID has clearly been a tailwind for the company. For example, in Sep-2019 revenue was growing 69% YoY and as of last quarter, revenue was growing 98% YoY. Gross margins, which the company does not report but I calculated below, have been ~25% (apart from a couple of quarters). Affirm releases a few non-GAAP figures such as contribution profit and GMV which are outlined in the following charts. The company converts ~10% of GMV into revenue. Affirm has $785.9M of cash and cash equivalents (includes restricted cash). Outputs of other metrics are below:
Historical P&L & ($000's)
Historical Metrics ($000's)
Given Peloton represented 30% of Affirm revenue last quarter (up from 14% a year ago), it is worth calling out. Peloton has seen their connected fitness product sales increase dramatically, and I thought it would be interesting to line up Affirm's Merchant Network revenue and Peloton's Connected Fitness Products (incl. Other) YoY growth rates for the past 4 quarters, and not surprisingly, they are somewhat correlated (see below). It's unclear what the diversion is over the past quarter.
Moreover, Affirm put the following Risk Factor in their S-1 related to Peloton.
A large percentage of our revenue is concentrated with a single merchant partner, and the loss of this merchant partner or any other significant merchant relationships would materially and adversely affect our business, results of operations, financial condition, and future prospects.
Our top merchant partner, Peloton, represented approximately 28% of our total revenue for the fiscal year ended June 30, 2020 and 30% of our total revenue for the three months ended September 30, 2020. Our top ten merchants in the aggregate represented approximately 35% of our total revenue for the fiscal year ended June 30, 2020 and approximately 37% of our total revenue for the three months ended September 30, 2020. The concentration of a significant portion of our business and transaction volume with a limited number of merchants, or type of merchant or industry, exposes us disproportionately to any of those merchants choosing to no longer partner with us or choosing to partner with a competitor, to the economic performance of those merchants or industry or to any events, circumstances, or risks affecting such merchants or industry. For example, the significance of Peloton in our portfolio has increased as a result of consumer spending trends on home fitness equipment, and there can be no assurance that such trends will continue or that the levels of total revenue and merchant network revenue that we generate from Peloton will continue. The loss of Peloton as a merchant partner, or the loss of any other significant merchant relationships, would materially and adversely affect our business, results of operations, financial condition, and future prospects. In addition, an anticipated material modification in the merchant agreement with a significant merchant partner could affect the results of our operations, financial condition, and future prospects.
Quarterly Gross Merchandise Volume (GMV) ($M)
Quarterly Revenue ($M)
Quarterly % Revenue Mix
Quarterly non-GAAP Gross Margin and Operating Expenses as a % of Revenue
Other Costs as a % of Revenue
Contribution Profit as a % of GMV and Contribution Profit "Walk"
Sales Efficiency and Cohorts
Affirm is not a SaaS company and so while the typical magic number math isn't apples-to-apples, there are a few ratios to look at in Affirm's business to understand if the efficiency of sales and marketing is improving or degrading. The below chart looks at the ratios of net new annualized GMV and revenue against LTM sales and marketing spend (GMV magic number divided by 100 to adjust for scale). As you can see, Affirm's implied net new GMV and revenue has been relatively constant against their sales and marketing spend.
Additionally, their dollar-based merchant retention has been above 100% for each merchant cohort.
The company also shared an output of their select merchant partners.
Consumer Customer Mix
Not surprisingly, most of Affirm's customers on the consumer side are millennials.
Credit Risk Model and Underwriting
Affirm believes their risk models are a competitive advantage in underwriting. As mentioned earlier, they have data from over 7.5M loans and 6 years of repayments. The company discloses some outputs around outcomes, portfolio net charge-offs and even the resiliency of their underwriting during COVID. The company has had a weighted-average quarterly delinquency rate of approximately 1.1% for the 36-months ended September 30, 2020.
Cash Flows ($M)
Quarterly P&L (000's)
Affirm's closest public comparable is Afterpay (APT.AX), which trades above 20x forward revenue. Afterpay does have stronger margins than Affirm, though. There are also companies like Lemonade which are trading ~30x forward revenue and payments companies like PayPal and Square that trade at 8-10x NTM revenue. Affirm will mostly likely get a "tech" multiple and not trade on P/E, like one of their public, legacy competitors, Synchrony Financial (NYSE:SYF). Synchrony trades at ~1.5x NTM revenue. Affirm stands to be a huge winner for earlier investors and could trade significantly above the Sep-2020 series G round that was at a reported ~$5B valuation.
Affirm is the leader in the U.S. in the “buy now pay later” space. While Afterpay is moving into the U.S., Affirm has inked deals with some of the largest and most important players in the e-commerce ecosystem, such as Peloton and Shopify. Affirm does have some risks; it's a capital intensive business, margins are lower and the valuation multiple is likely to be very high for what could be perceived as a traditional lending business. Peloton at 30% of total revenue (and driving much of their growth) is also a huge risk. Peloton generated ~$52M in top line for Affirm last quarter (and accounted for 56% of total Merchant network revenue). With that said, with the explosion in e-commerce due the COVID pandemic, Affirm is picking a great time to take the company public -- their growth has accelerated and margins have improved. There is a strong argument to be made they're driving real network effects (millions of app downloads and strong repeat usage rates) and with such high merchant retention, Affirm is clearly moving the needle for their end customers in uplift and conversion. Moreover, their first quarter reporting as a public company will include the Christmas/Holiday-season results, which are likely to be massive for the company. The company is also led by one of the most successful Silicon Valley entrepreneurs in Max Levchin. As mentioned earlier in this post, Afterpay's (APT.AX) share price is up almost 700% this year, and investors will want to take a bet on a huge market, a great CEO, and strong secular tailwinds in AFRM.
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*Meritech is an investor in Roblox.
I previously worked at Spark Capital, who is an investor in Affirm.
Special thanks to my partner Anthony DeCamillo for the help on this post.