Business Overview and History
Affirm Holdings, Inc. (AFRM) has emerged as a trailblazer in the rapidly evolving buy now, pay later (BNPL) industry, transforming the way consumers approach their financial decisions. With a steadfast commitment to transparency, innovation, and customer-centric solutions, Affirm has carved out a unique position in the fintech landscape, positioning itself for long-term success.
Affirm was founded in 2012 by serial entrepreneur Max Levchin, one of the co-founders of PayPal. Levchin's vision was to create a financial platform that would empower consumers and merchants alike, providing a more transparent and flexible alternative to traditional credit options. The company's mission is to deliver "honest financial products that improve lives."
Affirm's origins can be traced back to Levchin's frustration with the hidden fees and confusing terms often associated with traditional credit card products. He set out to create a more transparent and consumer-friendly alternative. The company's initial focus was on offering point-of-sale installment loans, allowing consumers to pay for purchases over time without deferred interest, late fees, or penalties.
In the early years, Affirm faced the challenge of building trust with both consumers and merchants. The company had to educate the market on the benefits of its transparent financing model compared to traditional credit cards. Affirm worked diligently to establish partnerships with merchants and integrate its technology onto their platforms, gradually expanding its network of retail partners.
A major milestone for Affirm came in 2016 when it secured its first major retail partnership with Walmart. This partnership not only validated Affirm's solution but also accelerated its growth, as the company was able to leverage Walmart's large customer base. Over the following years, Affirm continued to sign on other prominent retail partners, including Amazon, Peloton, and Shopify.
As Affirm's merchant network grew, the company also faced the challenge of securing adequate funding to support the increasing loan volume on its platform. To address this, Affirm established a diverse set of funding relationships, including warehouse credit facilities, securitization transactions, and partnerships with banks. This capital-efficient model allowed Affirm to scale its lending activities while managing risk effectively.
In 2021, Affirm took a significant step in its evolution by going public on the Nasdaq exchange. The IPO provided the company with additional resources to invest in product innovation, technology, and geographic expansion. Throughout its history, Affirm has remained focused on its core mission of providing honest and transparent financial solutions to consumers. The company has continuously innovated its product offerings, including the introduction of the Affirm Card, which allows consumers to access credit directly through their mobile devices.
Affirm is building a next-generation platform for digital and mobile-first commerce. The company provides consumers with a simpler, more transparent, and flexible alternative to traditional payment options. Affirm enables consumers to confidently pay for purchases over time, with no hidden fees, deferred interest, or penalties. The company earns revenue from merchant fees and interest income on consumer loans.
Financial Performance and Ratios
Affirm's financial performance has been marked by impressive growth, despite the challenges posed by the COVID-19 pandemic and macroeconomic headwinds. In the company's most recent fiscal year (2024), Affirm reported total revenue of $2.32 billion, a 46% increase from the prior year. However, the company has yet to achieve profitability, reporting a net loss of $517.76 million for the same period.
The company's operating cash flow (OCF) for fiscal year 2024 was $450.14 million, with free cash flow (FCF) of $290.84 million. This indicates that despite the net loss, Affirm is generating positive cash flow from its operations.
Key financial ratios paint a mixed picture of Affirm's financial health. The company's current ratio, a measure of its ability to meet short-term obligations, stood at 4.84 as of the latest reporting period, indicating a strong liquidity position. The quick ratio, which is a more stringent measure of liquidity, was 5.42, further confirming the company's strong short-term financial position. However, the company's debt-to-equity ratio of 2.35 suggests a relatively high level of leverage, which could pose risks in the event of a downturn.
Affirm's gross profit margin of 74% is a testament to the strength of its business model, as the company is able to generate significant value from each transaction. Furthermore, the company's return on assets (ROA) and return on equity (ROE) metrics, at -5.44% and -19.62% respectively, indicate opportunities for improvement in the company's overall profitability and efficiency.
Liquidity
Affirm's liquidity position remains strong, as evidenced by its current ratio of 4.84 and quick ratio of 5.42. This indicates that the company has sufficient short-term assets to cover its short-term liabilities. The company's cash and cash equivalents totaled $1.01 billion, providing a solid buffer against potential financial challenges. Additionally, Affirm has $4.0 billion in available funding debt capacity, excluding purchase commitments, and $205 million in borrowing capacity under a revolving credit facility. However, it's important to note that Affirm's ongoing losses and high debt levels could potentially impact its liquidity position in the future if not properly managed.
Quarterly Performance and Guidance
In Affirm's most recent quarter (Q4 2024), the company reported revenue of $659.19 million, a 51% year-over-year increase. However, the company continued to generate a net loss, reporting a figure of $45.14 million for the quarter. The operating cash flow for the quarter was $68.76 million, with free cash flow of $30.51 million.
Despite the ongoing losses, Affirm's management team has expressed confidence in the company's long-term prospects. In the company's latest earnings release, CEO Max Levchin stated that Affirm had a "killer quarter in fiscal year on both growth and profitability side of the ledger" in Q4 2024, suggesting they beat their previous guidance.
Looking ahead to fiscal year 2025, Affirm is guiding for Revenue Less Transaction Costs (RLTC) to expand by 10 basis points compared to the prior fiscal year. They are also guiding for Adjusted Operating Income (AOI) margins of 18.4% for fiscal year 2025. Management noted they are being "inherently conservative" in setting the guidance, with the actual performance expected to exceed the guidance. Newer initiatives like B2B and the Apple Pay partnership are not expected to be "material" to the fiscal year 2025 guidance, though they could represent upside if they progress faster than expected.
Product Segments and Revenue Breakdown
Affirm has two main product segments: Merchant Network and Card Network.
Merchant Network revenue primarily consists of merchant fees. Merchant partners or integrated merchants are generally charged a fee based on the gross merchandise volume (GMV) processed through the Affirm platform. The fees vary depending on the individual arrangement between Affirm and each merchant and on the terms of the product offering. For the three and nine months ended March 31, 2024, Merchant Network revenue was $159.29 million and $493.60 million, respectively, representing increases of 34% and 35% compared to the same periods in 2023. This growth was primarily attributed to an increase in GMV facilitated through Affirm's platform.
Card Network revenue is earned when consumers use Affirm's card issuing and network services. This includes revenue generated from Affirm's agreements with card-issuing partners and from the Affirm Card product. Card Network revenue increased by $6.21 million, or 21%, and $23.13 million, or 27%, for the three and nine months ended March 31, 2024, respectively, compared to the same periods in 2023.
In addition to these segments, Affirm generates revenue from Interest Income on the loans it originates or purchases, Gain on Sales of Loans, and Servicing Income. For the three and nine months ended March 31, 2024, Interest Income was $315.71 million and $866.74 million, Gain on Sales of Loans was $40.18 million and $127.17 million, and Servicing Income was $25.29 million and $67.89 million, respectively.
Market Expansion and User Growth
Affirm has demonstrated strong growth in its merchant and consumer base. The company has expanded its merchant network to over 292,000 active merchants as of the end of fiscal 2024, up from 246,000 the prior year. The number of active consumers grew 13% year-over-year to 18.1 million. This expansion has been a key driver of Affirm's revenue growth across its Merchant Network and Card Network segments.
Risks and Challenges
As with any rapidly growing company, Affirm faces a variety of risks and challenges that could impact its long-term success. These include intense competition from established players in the BNPL space, such as Afterpay and Klarna, as well as the potential for increased regulatory scrutiny and changes in consumer spending habits.
Additionally, Affirm's reliance on a small number of large merchants for a significant portion of its revenue could pose a risk if any of these key partners were to terminate their relationships with the company. The company's high debt levels and ongoing losses also present potential obstacles to its long-term financial stability.
Geographic Markets
Affirm primarily operates in the United States and Canada. The company does not break out financial results by geographic segment, indicating that its operations are largely concentrated in these North American markets.
Conclusion
Affirm Holdings has emerged as a disruptive force in the financial technology industry, offering consumers a more transparent and flexible alternative to traditional credit options. With its focus on innovation, strong merchant partnerships, and a growing customer base, the company is well-positioned to capitalize on the continued growth of the BNPL market.
The company has demonstrated strong revenue growth across its product segments, driven by expansion of its merchant and consumer base, as well as increased consumer engagement and transactions on its platform. Affirm's diversified revenue streams, including interest income, loan sales, and servicing fees, have contributed to its financial performance.
However, Affirm's path to profitability remains a work in progress, and the company will need to navigate a complex and competitive landscape to solidify its long-term success. The company's strong liquidity position and positive cash flow provide some cushion as it works towards profitability, but the high debt levels and ongoing losses remain areas of concern.
Investors interested in Affirm's story should closely monitor the company's ability to execute on its strategic initiatives, manage its financial risks, and continue to drive customer and merchant engagement in the quarters and years ahead. The company's conservative guidance for fiscal year 2025 suggests potential upside if Affirm can capitalize on its newer initiatives and continue its strong growth trajectory.