Affirm Public S-1 Filing
sec.gov
sec.gov
Major takeaways:
1.5% write-off rate for their jan 2020 vintage is very healthy - comparable to the long-term trend for unsecured superprime consumer debt. Given the (I suspect) lower average creditworthiness of Affirm customers, this is a great number. I'd be curious to see their long-term trend for same-age vintages, however. In consumer credit it's well known that all the stimulus support in 2020 has significantly depressed defaults. It would be interesting to see if this is a fluke, or if this is actually what their charge-off rate actually looks like in a normal environment/part of a bigger trend.
I'm a little skeptical of their claim to use ML & build a data moat for significantly better underwriting decisions. Consumer credit laws in the US so severely restrict what you can use for credit scoring purposes that better underwriting through data is basically a lost cause, absent some specific customer segment that has special credit situations.
Finally, as others have noted, 30% of revenue just from Peloton is an enormous number.
Can I inquire what your background is or where you found that information? Many companies supplement credit scores with additional data to make these types of decisions.
[1] https://zest.ai/
It seems from the S-1 that Affirm has grown it's market quite a lot, but my first and primary exposure to them is in the car scene. Affirm entered this customer segment and dominated pretty quickly as the creditor integration of choice for long time-scale projects with up front costs like custom engine builds. I imagine to some degree they are able to make decisions partly based on the nature of what is being purchased.
Their S-1 indicates this is shifting, but I have historically seen Affirm in places where a more typical online consumer credit organization like PayPal Credit / BillMeLater / etc doesn't play. Affirm seemed to be focused on larger sized purchases which would otherwise be paid on an installment plan, but filling that gap. Exercise equipment like Peloton is a great example, just as engine builds is a similar type of transaction.
So really it's a great way to take advantage of the credit markets and public company comps being extremely high while benefitting the customer.
| 2019 | 2020
------------|--------|--------
net revenue | $264 | $509
op ex | $391 | $617
net loss | $(120) | $(113)
loss ex SBC | $(79) | $(83)
volume | $2,620 | $4,637
customers | 2.05 | 3.62“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.”
“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.”
I'd sold my P already, but back in the day you'd go in, and it would cost 1800 or something, but then you add a (mandatory) subscription cost, (mandatory) delivery and assembly fee, and of course a pair of shoes and a matt, and now you've got yourself an indoor bike for 3k.
I wonder if it's still the same.
I just went through the Peloton flow to see for myself and indeed there's a 0% APR option for 3 years so it's clearly being paid for by Peloton.
It also explains to me why people might choose to use Affirm even if they could afford the upfront cost.
It's a really great deal as a consumer.
Affirm takes what would be a ~$600 or $2000 credit card transaction and turns it into a series of ACH payments. If (cost of ACH + cost of underwriting) < (cost of credit card merchant fee) then the merchant and affirm can split the difference.
Or lets look at doordash [1] despite the pandemic and most of its workers not being employees(low paid gig workers) it is still losing money at an astounding rate: $533M last year and with a pandemic bump of only a 149M loss this year so far(it expects orders to slow alot after the pandemic).
I feel like I am Michael Burry in the big short playing my drums pointing out the obviousness of the huge crash that is coming with alot of these companies. What is scary is alot of americans and foreigners for that matter have their retirement savings(401k) tied up into these mini-titanics. When the fed's tap gets turned off, expect a reckoning.
In the past, every time I thought "the Fed will have to tighten soon" something happens which somehow, magically, always requires more easy money to solve.
Example: Easy money caused a housing bubble that burst? Now we need easy money to fix unemployment and keep the markets from seizing up.
It seems that politicians have now decided that the easy-money solution is always the easiest one, with the least traceable future negative ramifications.
With the Trump presidency he made his north star be the stock market(and keeping it high) and its why he heavily pressured the Fed to keep interest rates extremely low to supercharge the economy(and make him look good).
If a vaccine comes quickly and is highly effective long term and covid is eradicated by late spring/summer I expect a big jump in the stock market and a red hot housing market, this would be a time to slowly increase the interest rates, wall street won't like it but at some point it will have to happen.
I don't see it as a problem because all of these companies have legitimate products/services, legitimate customers and legitimate cash flows. This isn't another dot com situation we are in. There are very few companies going IPO with just an idea. ("we're going to use the proceeds from this offering to build an online pets store called pets.com")
It is easy to say "its the stimulus" or "its the fed" but I think there is more going on at a fundamental level.
Before: Alice wants to buy a chair that costs $100 from Bob. Alice saves $10 a month and buys a chair. Bob got $100. Alice can buy a new chair every 10 months. She may also conclude after 10 months, that she doesn't want the chair that badly, and would instead save the $100 for retirement, or pay it into the house mortgage, reducing the amortization by a week.
Now: Alice wants to buy a chair from Bob. She gets a loan, paying $10 over 12 months. Bob gets $100, Affirm gets $20. Alice can now buy a chair every 12 months. Affirm's founder buys a supercar.
Slightly later: Alice's job gets cut due to COVID. She can now only pay $5/month. She gets a $100 stimulus check, but instead of paying off the chair, she buys Affirm stock and remortgages the chair to 24 months. Now Affirm gets $40 in interest and $100 in fed money routed through Alice.
Net effect: Alice's purchasing power has reduced 2.4 times, Affirm's founder buys 50 new yachts and starts a company that lets people get loans to buy food.
Don't forget that Alice gets to sit in the chair 10 months sooner, and study for their GMAT or CISSP.
So a more realistic scenario is that first she won't study in a library because she doesn't have a chair. Then, having a loan on the chair she won't study because the old phone is too slow. Then, having a loan on both chair and the new iPhone, she won't study it because it's just too hard and going to the pub with the friends is more fun. So she will end up with another loan for a liberal arts degree, and will then wonder how to pay it off from a Starbucks salary.
Sorry, like it or not, people appreciate hard-earned things more than something that comes seemingly for free. The best example is that 70% of lottery winners go bankrupt within the next few years [0].
[0] https://www.washingtonpost.com/outlook/five-myths/five-myths...
Yes, with financing there’s a trade off. In exchange for paying interest, you have the item that much sooner.
Slightly tongue-in-cheek, but this is missing in your before example:
Alice has to sit on the floor because she doesn’t have a chair. After 10 months of doing this, she has terrible posture and joint pain from sitting on the floor all the time. Despite her pleas, doctors say that her increased purchasing power won’t cure her ailments.
Except then you want your next item and can't buy it because your credit limit is maxed out. So you have moved your "item queue" forward once or maybe twice, and now have one more rent to pay. You still have to wait for the next item, it's just instead of waiting for your savings to reach $100, you wait for your debt to drop to N - $100 where N is your credit limit.
It makes sense for strategic items, like a house or a car. But doing it on a daily basis is just poor financial planning.
>Alice has to sit on the floor because she doesn’t have a chair.
Motivated Alice should go around garage sales and find a used chair for $5. Or research how to make a makeshift one from whatever she has. Or borrow it from a friend. Or read in a library and eat cheaper food for 2 weeks, and save $100 right away.
All these are problem-solving and prioritization skills, and they are crucial to one's long-term success. And the difference in life quality between America and Zimbabwe is because the previous generations of Americans possessed these skills and applied them wisely. Except now the big players realized that they can make more money off people without these skills, so the popular culture is instead praising impulsive decisions over carefully weighed plans, and pushing people deeper into poverty.
The grossly misrepresents what's happened in Zimbabwe.
I believe your intention was to suggest that by corrupting certain skills or values around finance or thriftiness or learning to build, etc etc, that the USA is on course for a significant decline in quality of life?
However, Zimbabwe's problems are rooted in a different, and much more pernicious, sort od corruption.
Affirm is just a "micro-transaction" take on that very large and lucrative market. They extend a fixed term, one-time line of credit equal to your transaction amount and no more. Want to use Affirm for another transaction? That'll be an entirely independent line of credit for that transaction, subject to its own application/approval process.
There are a lot of somewhat novel aspects to Affirm's approach, but the core premise of Affirm itself one of them. For better or worse, making it easy for consumers to over-extend themselves by dangling a credit line at the point of sale was widespread and lucrative long before Affirm entered the market.
Affirm is effectively a broker for loans issued by Cross River Bank
Good for them, I'll be buying shortly after their IPO.
The PoS thing i am talking about was even before ecommerce was common was mostly decentralized through the seller. Overtime, banks started getting into this niche, and when you were paying with credit card, they offered you installments usually at 0% apr for few months. Eventually this moved to e-commerce with websites offering similar payments.
I also sort of remember in the US some credit cards (probably chase?) offered installments after you pay for the item - you'd login into your account, and pick a purchase to pay over time.
Aside from those, they could be a really attractive business.
"diverse set of capital partners"