Affirm Public S-1 Filing

[112012123]

Interesting. Overall, I agree with everyone else - Affirm looks like a healthy company.

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.

[tristor]

> absent some specific customer segment that has special credit situations

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.

[raiyu]

When you look at 30% of revenue from Peloton, and that their interest rate revenue is lower than merchant fees, it's basically companies paying to finance larger purchases for their customers because they get to book the full revenue on their books immediately, pay down the interest through merchant fees themselves, get higher numbers on their books, increase their market cap, and for consumers it's a benefit because why not finance it over a period of 39 months than be out of pocket immediately or finance it through a credit card with high interest rates.

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.

[momokoko]

> 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.

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.

[granzymes]

FY Ended June 30, in millions

              |  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

[toomuchtodo]

Am I right in reading 30% of their rev is coming from Peloton? (Control-F “Peloton”)

“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.”

[xoxoy]

doubling revenue while keeping losses stable is pretty good, especially when we’re talking about consumer credit

[slow_donkey]

Wonder if I'm the only one surprised by their actual revenue model. I had always assumed they made money off loan interest from consumers which they do, but it turns out over half of their 2020 revenue came from merchant fees instead.

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.

[jakemal]

I moved about 5 months ago and purchased a few thousand dollars worth of furniture. I could have paid cash but since it was 0% APR, I used Affirm and set the money aside in an investment account that has paid for ~20% of the total cost. Of course it could have gone the other way, but it was a risk I was willing to take.

It's a really great deal as a consumer.

[warent]

If you have the Affirm app on your phone it isn't too surprising! They have a full e-commerce platform setup with numerous brands. I've used Affirm for years to help build my credit with 0 APR and I'm a very happy customer. Excited about their future.

[cbhl]

I feel like the retailer side makes sense, even if you do 0% APR. The alternative to Affirm's merchant fee is a credit card merchant fee (say, 2.9%).

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.

[ec109685]

Doesn’t this break down once interest rates ride higher then credit card rake?

[subsubzero]

The floodgates in 2020 have opened with IPOs of alot of these unicorns, Palantir, doordash, airbnb, affirm, jfrog, snowflake, asana. I wonder why the sudden timeframe to go public. My guess is they want to ride the wave of stimulus money that has been going on during the spring/summer and the 2nd round which has yet to happen.

[newguy1234]

I don't see it as a problem. Innovation is accelerating with new business models and so on. Adoption curve for new technologies could be occurring quicker as well thanks to social media (easier to "spread the word" about new products/services/technologies).

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.

[xoxoy]

I mean look at the market - we’re at all time highs. It’s more the trillions the Fed pumped into the markets than stimulus.

[chrischen]

It's not just stimulus money, but a lot of people save money by not traveling/driving/eating out/going to events.

[mbesto]

There is a bigger macro trend here - public investors are clamoring to get in early on the next $ZM, $AMZN, $GOOGL, etc. even if they place bets on 5 of these companies and 1 pans out, it'll far exceed the SP500.

[adrr]

Historic low interest rate shifted a lot of capital to the stock market. Bonds don’t pay anything.

[iloveitaly]

I have a friend who works for the big four in M&A. He said there's a rush of deals with explicit EOY deadlines because of the tax environment uncertainty. I can't imagine this doesn't play a major role in all of the IPOs happening before EOY as well.

[BMorearty]

In Airbnb’s case their hand was forced. RSUs given to employees in 2014 are going to expire if Airbnb waited til 2021.

[akrymski]

There is something fishy about selling a product with 0% APR - it means as a consumer you're actually WORSE off if you DON'T get the loan (since you would earn interest on the cash in your account). Forcing people to borrow when they don't have to is a strange way to make money off fees?

[fairity]

I'm sure it increases conversion rate for the seller, especially for expensive purchases.

[kirillzubovsky]

Totally. For consumers who can afford cash, it simply inflates the cost of the bike. Consumers see 0% and think free, but in reality the cost of the loan has already been priced into the cost of the bike. There's no free lunch.

[akrymski]

> Our agreement with one of our originating bank partners, Cross River Bank, which has originated the substantial majority of loans facilitated through our platform to date, is non-exclusive, short-term in duration and subject to termination by Cross River Bank upon the occurrence of certain events, including our failure to comply with applicable regulatory requirements. If that agreement is terminated, and we are unable to replace the commitments of Cross River Bank, our business, results of operations, financial condition, and future prospects would be materially and adversely affected.

Affirm is effectively a broker for loans issued by Cross River Bank

[tehlike]

affirm is one of those things that was pretty interesting. Coming from a country where micro-installments at PoS was standard, i always thought it was really interesting the US didn't have it.

Good for them, I'll be buying shortly after their IPO.

[ac29]

Maybe not quite the same thing as in your country, but layaway used to be fairly common in the US: https://en.wikipedia.org/wiki/Layaway

[vira28]

If robinhood is a merchant, I would love to buy affirm through affirm.

[xwdv]

I will buy at IPO. Fantastic company.

[llsf]

Instead of relying on your credit card, you use the vendor (or someone else) credit, to pay over time. Looks like in some cases, they integrated in the vendor website, so when paying you can directly select Affirm. I did the test with Dyson, it redirected me to the Dyson website, and Dyson does already offers payment installments at 0% APR (12 months). Looks like Affirm does the math for you, if there is an APR, so you know the true cost. And it keeps all your debt nicely listed in the mobile app. So, you know what you owe every month. Hopefully Affirm helps you not overstretch... This could help people who do not fully grasp the true cost of those credits, and hopefully help them manage their debt.

[vira28]

If merchants mostly pay the fee, how long before companies like Affirm becomes a commodity? (meaning won't the competition drive the fee down?)

[nt2h9uh238h]

It didn't happen to credit card companies in 60 years. They still charge merchants 2,9%. It's like a giant duopoly and fixed pricing. But in a real market, ofc you would be right. Maybe congress should look at VISA, Mastercard, AMEX instead.

[supernova87a]

Wow, kind of amazing that they're not losing tons of money through sales + marketing like every other IPO lately who lose 50% there. (they are losing money though). A little scary though, how much money they lose through bad credit write-offs, and what's the item about a huge loss for loan purchase commitments, both years?

Aside from those, they could be a really attractive business.

[stevofolife]

Can anyone recommend a good way to digest a public filing? Like understand in a nut shell way, instead of reading through the whole thing.

[throwaway69123]

Where does Affirm get their under writing for its credit?

[solumos]

> As of September 30, 2020, we had over $4.2 billion in funding capacity from a diverse set of capital partners, and we have funded approximately $10.7 billion of purchases since July 1, 2016.

"diverse set of capital partners"