On August 28, Affirm Holdings, Inc (AFRM) showcased the true strength of the Buy Now Pay Later (BNPL) model with its resounding Beat n Raise Q4 Report. With the stock currently in an excellent technical position, the Fed poised to begin cutting rates, and some compelling catalysts just ahead, we believe this a great time to get involved with the story.
On the call, CEO Max Levchin acknowledged the strength of the quarter by stating simply:
Obviously, we had a killer quarter in fiscal year on both growth and profitability side of the ledger. So as is our custom, the better the results, the less comment I'll offer. There are some really good new stats in the letter that Michael and I sent, so please have a look at that.
To wit, Gross Merchandise Volume grew 31% to $7.2B. Active Consumers grew 19% to 18.6M. Transactions Per Active Consumer grew 22% to 4.9 and Revenue grew an impressive 48% YoY to $659M. Killer quarter is right!
Over the past 5 quarters, the company’s Direct-to-Consumer Biz, namely its Affirm Card, has really taken off as well. The term “Hockey Stick Growth” gets thrown around a lot on the Street but you can see the Affirm Card is the real deal, increasing to 1.2M Active Users in Q4’24.
Currently, the annual spend on the Affirm Card hovers around $3k but Levchin has set a goal of more than doubling that to $7.5k and increasing the number of active cards to 20M. With the average credit card debt in America totaling $8,674, per the Federal Reserve and US Census Bureau, this seems very doable.
That's the target. When we get there, I don't know, but that is what I think is both possible and required for us to succeed. Are we going to get their fiscal '25? Probably not, certainly not making any promise on that front, but the leads that we're showing in these charts speak for themselves. They're big. That means there's a lot of opportunity. So we forecast what we think we'll get and that's in the guide…
Finally, the discussion on the company’s Apple Pay partnership, was not only a Victory Lap for Affirm but it also crystallized how complex these transactions are and how important it is for prestige brands, like Apple, to partner with the leader in BNPL. There’s a very real reason Affirm enjoys preferential treatment by retailers like Amazon, Best Buy, Google Pay, Target and Walmart amongst others.
When asked by Mizuho analyst, Dan Dolev, if Apple had “seen the Light” and capitulated in the area, Levchin had this to say: [IMPORTANT!]
So on the Apple side, I don't think they're capitulating. I think they, if anything, are saying this Buy Now Pay Later thing is huge and important and it's not a feature. It's a major thing…
It’s embracing the fact that this is a complicated really, really textured set of offerings that works in different ways for different audiences.
Underwriting is hard. You got to get data. You got to get it in real time. You have to verify it for both validity and accuracy and timeliness and all the good stuff. And it's a real complicated thing that we do here really well. We've been at it for 13, 14 years almost now. And that's our DNA.
People talk about AI as if it happened yesterday. We've been in what used to be known as AI for a lot longer than it was a thing that people throw around as a reason to lay off their employees. So we use a lot of machine learning and we do a lot of good work there. So that's hard. And unless you're focused on it you're not going to do as well as a specialist like we can.
And the way we're going to make it work is not by giving consumers flat out cash back or discounts or all sort of tired credit card tricks, we're going to give them access to credit on extraordinary terms. With no APR at all or really low subsidized APR, that's going to matter to a certain consumer in a really big way.
It's going to help them get off the sidelines and buy right now and help you Mr. and Mrs. Merchant, drive more volume… this is actually what makes this product SO SPECIAL.
As BNPL grows in popularity and more and more consumers eschew credit cards in favor of this more flexible form of debt payment, we believe AFRM will stay ahead of the competition in the space.
Management is best-in-class and has invested heavily in the company’s tech with engineers making up a third of the overall headcount. This should ensure Affirm’s “textured set of offerings” and underwriting capabilities become even more nuanced over time and remain leading edge.
Whether the Fed cuts by 25 or 50 bp, this new easing policy will boost Consumer Spending as borrowing costs become cheaper and cash-strapped consumers opt for the most cost-effective way to sustain their lifestyles. If we’ve learned one lesson in 30+ years of trading, it’s to NEVER count out the spending habits of the US Consumer. With this in mind, we sense another beat is on the way for Q1’25, when Affirm reports in early November.
While the Top Line growth will likely decelerate a bit in Q1 vs Q4, analysts are still guiding for Revenue of $663.61M and YoY growth of 33.6%. The outlier, in our opinion, lies in Q2 when the full impact of Apple Pay is felt after swarms of Apple Users go hard at the Mall, Black Friday/Cyber Monday and the rest of the Holiday Shopping Season.
Current Revenue Estimates of 31.9% for Q2’25 seem way too low. We think a 40% quarter is much more likely, leaving a big dispersion between our model and theirs. On the call, Levchin guided AFRM to GAAP Profitability by Q4’25, with plans to maintain profitability going forward from there. Levchin also addressed the company’s progress in margin expansion, emphasizing the room to grow even more:
I believe that the JPMorgan Conference last May, I outlined that we would expect to continue to expand margins. We're signing up for 200 basis points this year and feel like we still have quite a bit of runway of margin expansion to do into the future and that would just be tempered with the opportunities that we have to invest, in particular, in continuing to expand our team.
Taken together, we think Affirm reaches GAAP Profitability in Q2’25 as opposed to Q4 – in other words two quarters early.
Should this play out as we think it can, the stock should re-rate to the mid-$60s over the next 6-9 months. Afterall, for a $14B Market Cap with $3B in Sales, growing 30% YoY would equate to less than 7x Forward Sales. Not unreasonable at all.
Technically, the Market’s discounting mechanism appears to be readying itself for the re-rate higher over the next couple of quarters. After forming a 2yr Cup n Handle, AFRM broke out of its handle on its Q4 Report and has been consolidating the move ever since. In the near-term $45 is the first level of resistance with $52 being the next major level on the chart.
Post-Fed, we think AFRM begins grinding up to new 52wk Highs into the November print. With another nice beat in Q1, it should be clear-sailing to $60 and the mid-$60s after that.
We are long AFRM calls and plan to add to our position on a high-volume move past $45. We will then trade tactically with our position with the intent to keep the majority position into the Q1’25 Report.
Stop Loss: We plan to use $37.50 as our Stop on this trade.
There is the risk that Affirm does NOT reach GAAP Profitability as quickly as we anticipate which would negatively affect our expectations for the stock to re-rate.
A recession would likely create a slowdown in Consumer Spending which would in turn affect the BNPL landscape and spur credit defaults as well. In such an environment, the company could be forced to reduce head-count which could negatively affect its leading edge position in the BNPL space.
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Disclosure: We are long AFRM stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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