Description

While shorting anything with topline growth has been a fool’s errand in the post-COVID bubble we believe that Affirm (AFRM) is one of the most stark business model mischaracterizations in the market right now.  We are short and have a $30 price target, approximately 75% below the current price of $122, based on the following thesis:

• AFRM has high exposure to subprime consumer credit, per their securitization docs, almost ⅓ of their interest bearing loan book has a FICO of <650 

• Sell side initiations rolled out today, when reading through Truist (41 pages), Goldman (21 pages), and Credit Suisse (78 pages) the word “subprime” comes up exactly zero times 

• The “sweet spot” for Buy Now Pay Later (BNPL) on the prime end where the merchant funds the economics is likely much smaller than the market thinks and should shrink as the merchants realize the inefficiencies of this spend

• Peloton is a 30% customer and they accounted for about 45% of AFRM’s growth in 2020, not only that but they pay AFRM a 12.5% coupon to underwrite their bikes which is more than double what other merchants are paying, all this leaves AFRM very exposed to a vaccine/WFH unwind as PTON faces very difficult comps

• Competition in BNPL is heating up, along with Afterpay, AFRM, and Klarna, PayPal/Visa/Mastercard/Synchrony/Progressive are all coming to the market w/offerings

• AFRM claims to have a secret sauce in their form of their AI algos which has allowed them to see charge offs decline throughout 2020, but looking at any consumer credit business it is obvious that this is an industry wide phenomena as stimulus checks have allowed consumers to pay down debt or increase savings 

• AFRM trades at 33x 2022 sales, while crazy on an absolute basis its also much more expensive than the other BNPL players, AfterPay at 16x sales, Katapult at 2x sales

Consumers have finite spending power, this hasn’t changed in centuries, so finding a new platform to extend them credit on isn’t revolutionary or “a better mousetrap”, nor will it be immune from competition or credit cycles which cause most consumer lending businesses to trade a single digit P/Es.  While AFRM has a better platform to grow off of, the business model is actually most similar to GreenSky (GSKY) when you track how a dollar actually moves through the process, funding sources, interest rate risk, etc...Due to the high growth nature of the business and it’s high profile partnerships (notably SHOP)we think it can trade at 7x sales, or $30, but wouldn’t be surprised to see it trade lower than that over time as the gravity of consumer lending exerts itself.

Brief Business Overview

Affirm’s e-commerce based payment solution allows consumers to pay for purchases over time in fixed amounts. When consumers proceed to the checkout page of their online cart they will be presented with an option to pay with Affirm next to standard credit/debit/loyalty options.  Consumers are offered either true 0% APR payment options (46% of GMV), or interest-bearing loans(54% of GMV). The company has more than 6.2M consumers and  6,500 merchants on the company's platform.   Gross merchandise volume (GMV) is ~$10.7B with ~64% of loans taken on by repeat customers.  Revenues come from two main sources: Merchant Network (50% of revs), and Interest (37% of revs). Merchant Network revenue is derived from a merchant discount fee paid by the merchant, typically 5-6% of the transaction value. Interest income is generated from consumer payments on their interest bearing loans portfolio, the average rate is 25%.  Due to the low penetration of online installment financing, COVID tailwinds to e-commerce spending, and PTON’s success business at AFRM has been white hot with revenues growing over 60% in 2020.

Subprime Exposure

• The company stresses that it doesn’t like to talk about FICO scores and considers them to be a poor indicator of credit quality, but, for those that do here are the table from their most recent securitization: