Affirm Holdings, Inc. (NASDAQ:AFRM) is a leading fintech company that has carved out a unique niche in the digital commerce landscape. With its mission to deliver honest financial products that improve lives, Affirm has positioned itself as a disruptive force in the traditional payment ecosystem. As the company navigates the current macroeconomic environment, its resilience and innovative approach have positioned it for long-term success.
Business Overview
Affirm's platform enables consumers to pay for purchases over time, offering a transparent and flexible alternative to traditional payment options. By partnering with merchants, Affirm provides point-of-sale financing solutions that allow consumers to split their purchases into fixed monthly payments, without hidden fees or deferred interest. This model has resonated with both consumers and merchants, as it enhances the shopping experience and drives increased conversion rates and average order values for Affirm's partners.The company's revenue is primarily generated through merchant network fees, card network revenue, interest income, and gains on the sale of loans. Affirm's merchant network revenue, which accounts for a significant portion of its top line, grew by 35% year-over-year to $493.6 million in the nine months ended March 31, 2024. This growth was driven by a 32% increase in gross merchandise volume (GMV) to $19.4 billion, as the company continued to expand its active merchant base and attract more consumers to its platform.
Navigating Macroeconomic Headwinds
Affirm has demonstrated resilience in the face of the current macroeconomic challenges, including elevated inflation and rising interest rates. The company's business model has proven to be relatively insensitive to minor interest rate fluctuations, as its cost of capital has not been dramatically impacted by the Federal Reserve's rate hikes.In the nine months ended March 31, 2024, Affirm reported a net loss of $472.6 million, compared to a net loss of $779.4 million in the same period of the prior year. While the company continues to operate at a loss, it has made progress in improving its financial performance, with its adjusted operating margin reaching 15% to 17% in the fourth quarter of fiscal 2024, up from -31% in the nine-month period.
This improvement in profitability can be attributed to Affirm's focus on driving strong growth in its unit economics, with revenue less transaction costs growing rapidly, while the company has also managed to keep its fixed operating expenses flat or even declining. The company's guidance for the fourth quarter of fiscal 2024 suggests that it expects to maintain this momentum, with revenue growth projected to be well above its long-term target of 20%.
Affirm Card: A Promising Growth Opportunity
One of the key drivers of Affirm's future growth is its Affirm Card, a debit card that allows consumers to pay in full or use the company's buy now, pay later (BNPL) feature. The recent cohorts of Affirm Card users have demonstrated higher engagement and usage compared to the initial adopters, as the company continues to refine the user experience and introduce new features.While Affirm Card GMV was down sequentially in the third quarter due to seasonality, the company has seen a steady increase in the percentage of pay-now transactions, indicating that consumers are becoming more comfortable with the product and integrating it into their daily spending habits. Affirm management remains excited about the long-term potential of the Affirm Card, which they believe could develop into a multi-billion dollar business in the coming years.
Liquidity
Affirm's capital-efficient funding model is a key strength of the business, as it allows the company to support its growth while maintaining a diversified funding base. The company's funding sources include warehouse credit facilities, securitization trusts, forward flow arrangements, and partnerships with banks.As of March 31, 2024, Affirm had $2.1 billion in cash, cash equivalents, and available-for-sale securities, as well as $4.0 billion in available funding debt capacity, excluding its purchase commitments from third-party loan buyers. Additionally, the company had $205.0 million in borrowing capacity available under its revolving credit facility. This strong liquidity position provides Affirm with the flexibility to navigate the current macroeconomic environment and continue investing in growth initiatives.
Geographic Expansion and International Opportunities
Affirm's success in the United States has positioned the company to explore international expansion opportunities. The company's recent launch in the United Kingdom, leveraging its experience in Canada, demonstrates its ability to adapt its platform and underwriting models to new markets.While Affirm expects a period of learning and "pain tuition" as it enters new geographies, the company's focus on building local funding relationships and carefully managing credit risk suggests that it is well-equipped to replicate its domestic success in international markets. The company's long-term vision is to become a ubiquitous brand in the payments industry, much like Visa and Mastercard, which could unlock significant growth potential in the years to come.
Financials
In the nine months ended March 31, 2024, Affirm reported revenue of $1.66 billion, a 46% increase compared to the same period in the prior year. This growth was driven by a 32% increase in GMV to $19.4 billion, as well as a 84% jump in interest income to $866.7 million. The company's net loss for the nine-month period was $472.6 million, an improvement from the $779.4 million net loss reported in the same period of the prior year.Affirm's active consumer base grew by 13% year-over-year to 18.1 million as of March 31, 2024, while the number of transactions per active consumer increased by 27% to 4.6. These metrics highlight the company's ability to drive user engagement and repeat usage, which is crucial for its long-term success.
Risks and Challenges
While Affirm has demonstrated resilience in the face of macroeconomic headwinds, the company is not immune to the potential impact of a prolonged economic downturn. Elevated interest rates and inflationary pressures could lead to increased delinquencies and charge-offs, which could in turn impact the company's financial performance.Additionally, Affirm operates in a highly competitive and rapidly evolving industry, with established players and new entrants vying for market share. The company's ability to maintain its competitive edge and continue innovating its product offerings will be crucial in the years ahead.
Regulatory changes and compliance requirements also pose a risk to Affirm's business, as the company is subject to the oversight of the Consumer Financial Protection Bureau and other regulatory bodies. Any changes in the regulatory landscape could impact the company's operations and financial results.