About Affirm Holdings
Buy now, pay later.
What initially is dressed up as a sort of bland, uninteresting concept is actually, in my opinion, kind of a legendary, if not revolutionary one.
Well, sort of.
Like essentially anything in this life, there are pros and cons and while at first blush the idea is fairly self-explanatory, there are so many moving parts and complications behind the curtain, which I suppose would constitute as a perpetual con, especially as the company continues building out and scaling its services and the sheer amount of markets it serves.
But make no mistake about it, it can still be viewed as a sort of encapsulating idea.
Headquartered in San Francisco, California, Affirm Holdings (better known simply as Affirm) can be thought of as a de facto financial institution that makes money in a similar fashion to that of any other regular bank.
Specifically, Affirm makes money through both the interest rates it charges its consumer customers on the loans they opt to take out and it also apparently charges its merchant customers a fee for processing these transactions.
A brief example might help simplify and/or debunk this financial technology (fintech) company’s business model.
According to Affirm’s website, the company has partnerships with brands and retail outlets such as Target, Walmart.com, Amazon, Priceline, Expedia, Adidas, Apple, The Home Depot, Best Buy and various others.
Let’s say you and I went to The Home Depot and stumbled upon an outdoor sofa sectional that we just so desperately needed to buy, but we didn’t have enough to pay for the entire sectional when we first laid our eyes on it.
Affirm’s platform allows it so that we could purchase said sectional without paying full price (that day, at least), allowing us a sort of grace period between when we make the purchase and when we actually end up fully paying for the sectional.
Of course, Affirm ought to get something out of it so they’ll more than likely charge interest until we pay it back and once that happens we are even-steven again.
Additionally, the company will also seemingly charge Home Depot a fee for processing this transaction, which is more likely than not going to make sense for a retailer such as this one because if not for Affirm, we might not have actually purchased the sectional and given Home Depot the sale.
Bada bing bada boom.
While it is certainly an intriguing concept and business model to both merchants (Home Depot in the previous scenario) and consumers such as you and me, isn’t it sending sort of a bad message and what happens if the consumer doesn’t end up actually paying back the loan it took out with Affirm?
I mean, when people couldn’t or just simply didn’t pay their mortgages in 2007 and 2008 that worked out exceedingly well, right?
Oddly enough, Affirm doesn’t charge late fees but if one does not fully pay (or doesn’t pay at all) their loan, it could ding their credit score and also negatively impact the sorts of loans or interest one has to pay on future loans taken out with Affirm, that is, even if the company allows you to take out a loan moving forward.
We understand that the company is trying to set itself apart from traditional credit card companies in not charging late fees or related penalties, however, one of the keys to Affirm’s success is fair but rather strict lending standards and for those that haven’t historically made their payments, a hard, objective view of their ability to take out a loan once more with the company.
This is one general concern we have with a platform such as this one, however, if Affirm can maintain the standards it already has in place and keep delinquencies as low as possible while simultaneously attracting more users to its platform, we don’t think the future is all that bleak for this company, as, again, it is a very interesting concept that was surely going to come into fruition at some point.
At any rate, we can’t undoubtedly say that for sure until we do some digging with respect to its core financials and pertinent metrics and ratios.
Let us begin.
Affirm’s stock financials
Affirm has a present market capitalization of $5.73 billion, a share price of $19.50 and no annually distributed dividend nor a readily available price-to-earnings (P/E) ratio in sight, which, to us, makes complete sense as this younger fintech platform is probably burning through some cash (as many if not most technology start-ups do, at least in the early years) given that it is likely doing anything and everything to perfect and continue scaling its core business(es) and offerings, which, in the fintech realm, tends to cost a pretty penny if you’re doing it right.
Thus, it doesn’t make much sense at all to pay out an annual dividend to investors yet as it would act more as a cash drain than a tool to enhance shareholder value and not having a price-to-earnings ratio displayed indicates that this company is reinvesting all of its earnings back into its business, which we expected and appreciate as prospective shareholders if this is in fact the case.
With respect to the company’s balance sheet, Affirm’s executives are tasked with managing and tending to just about $7 billion in terms of total assets along with around $4.4 billion in terms of total liabilities, which is frankly a lot better than we had initially anticipated given the nature of the consumer lending industry, as it implies that this company has implemented and enforced some relatively tight lending standards, which, again, is a must going forward.
Affirm is seemingly well capitalized at the moment and we like it.
Onto the company’s income statement, Affirm’s total annual revenues since 2019 have done exactly what they were supposed to do; grow.
For instance, the company’s revenues in 2019 were reported as being $265 million, $478 million the following year, $781 million in 2021, leading up to its latest displayed figure on TD Ameritrade’s platform of just north of $1.1 billion.
It appears as though consumers and companies are adopting this platform, at a rapid rate at that.
As Ed from Good Burger would say, yippee skippy!
Candidly, we expect a lot from younger technology companies that are popular on Wall Street, and with that, brisk year-over-year (YOY) revenue growth because if revenue is slowing (even just a little bit) this early on, there is more than likely an underlying problem with the company’s products and them not being adapted by the masses, which, thankfully seems to be far from the case with Affirm.
Now, onto the cash burn campfire as we take a gander at the company’s cash flow statement.
With strong revenue growth usually follows a proportionate amount of cash burn, which has been the case with Affirm, which isn’t by any means the end of the world, but it is something that must be tamed over time before it spreads like a wildfire and potentially envelopes this entire company.
Thankfully, however, in the case of Affirm, it seems to have a sufficient amount of asset coverage according to its balance sheet (for now, at least) but it is still something investors ought to monitor for quarters and years to come.
Specifically, the company’s total cash from operations has been negative since 2019, ranging from -$88 million in 2019, stretching even further towards the downside to its latest displayed figure (2022) of -$162 million.
Sure, Affirm’s cash burn cycle has ramped up a bit but it has the outsized, growing annual revenues to back this sort of loss up, which gives us some much needed confidence that this company can afford to absorb and sustain these annual losses, again, at least for now.
Affirm’s stock fundamentals
And with some cash burn usually follows a muted (to say the least) trailing twelve month (TTM) net profit margin and this is most definitely also the case with Affirm Holdings.
For example, also according to the figures displayed on TD Ameritrade’s platform, Affirm’s TTM net profit margin is substantially lower than that of the industry’s listed average, sitting well below at -74.58% with respect to the industry’s average of a more healthy 28.56%.
This could be caused by a few different things, however, one thing that instantly comes to mind is the continual high costs it is probably incurring through the cash burn process, which, again, is quite commonplace for younger technology companies, or perhaps its pricing isn’t fully there yet and needs some work in order to beef up its (profit) margins in order to become more competitive with the opposition on this front.
At any rate, Affirm needs some work but in time, as long as the company continues nabbing market share and slowly watering its cash flow bonfire, we feel that it wouldn’t be far fetched at all for this company to obtain a positive TTM net profit margin, even if it does take some time, as we think it most certainly will.
Onto the company’s TTM returns on assets and investment(s), Affirm’s, to basically no one’s surprise, are noticeably lower than those of the industry’s averages, for instance, with Affirm’s TTM return on investment sitting at -13.65% to the industry’s listed respective average of 16.49%.
Affirm will likely improve in this arena as time and efficiency within the company progress, as this company is undoubtedly in an investment-heavy phase at the moment and thus rendering any sort of competitive returns will take some time, however, we have our fair share of confidence that it will be able to garner some positive returns in the long run.
Should you buy Affirm stock?
Patience is key with this company and its stock (NASDAQ: AFRM), in our opinion, if you couldn’t already tell.
For this company to produce a positive TTM net profit margin and returns on both investments and assets, it will take some time but it is still seemingly a matter of when and not if it will be able to drift up into positive territory.
What is confidence invoking with this company is the fact that even during some of the darker periods of the economy’s recent history, consumers still are, well, consuming but even more importantly in this context, consuming through Affirm and its platform.
We think this is a business model as well as a method of commerce that resonates with many, especially the younger, rising generations but it also presents some deep thinking and consideration on the part of Affirm and its leadership, namely, how to keep loan losses at an absolute minimum.
Considering all of the facts and the way in which the world is moving, we think it is most appropriate to lend Affirm’s stock (NASDAQ: AFRM) a “buy” rating given its historically depressed stock price.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.