To The Moon

Is Affirm Holdings' "Buy Now Pay Later" good business??

A bizarre thing happened an hour before closing on February 10th.

An intern of $Affirm Holdings, Inc.(AFRM)$ , accidentally leaked earnings information in advance on the official $Twitter(TWTR)$ account, so the company had to release the report earlier on the trading time.

As a result, the company's share price changed from an intraday increase of over 10% to a plunge of 21%, mostly due to the problem the information leaked was "only good but ignore the bad", the greater losses made investors scared.

Earning is really mixed as follows,

• Revenue up 77% year-on-year to US $361 million, exceeding the consensus of US $332 million and higher than the highest estimation of US $355 million.
• Total GMV reached USD 4.5 billion, up 117% year-on-year, exceeding the consensus of USD 3.7 billion
• Revenue of virtual cards was 26.56 million US dollars, a year-on-year growth rate of 145%; Interest revenue was up 128%;
• Total operating expenses were US$557 million, up 136% year-on-year, higher than 99.2% in the previous quarter and exceeding the market expectation of US$431 million. And the market cost is US $143 million, far exceeding the market expectation of US $76.68 million.
• Operating loss was US$196 million, up 632% year-on-year, exceeding the expected consensus of US $110 million, and the net loss was US $160 million, up 406% year-on-year. Among them, the stock compensation reward is 88.54 million US dollars, and the adjusted loss is still larger than expected.

The company attributed the huge losses to the increase of stock compensation after IPO, acquisition-related expenses, increased marketing and sales expenses and provision for credit losses.

The increase of stock compensation can be considered as an adjustment item, not a big deal.

However, the marketing expenses and credit losses are really tough.

Marketing expense as greatly exceeded expectations, which means,

1. Company is weak on the upstream and downstream. Although AFRM is the only non-bank $Amazon.com(AMZN)$ payment partners, but its cost for channels and promotion is obviously higher, and it is very passive in cooperation with Amazon;
2. Competition in lending industry is also fierce. $Upstart Holdings, Inc.(UPST)$ ​$SoFi Technologies Inc.(SOFI)$ are also very fast-growing companies and is expected to cooperate with e-commerce in the future, which increases the pressure on the company, "BNPL" is already in PRICE WAR.
3. The potential impact of inflation on the advertising. With the release of the Jan CPI, the expenditure on marketing in the coming months is not optimistic.

We should pay attention to the fact that the financial report in the fourth quarter actually has a great bonus for AFRM, which has deep cooperation with Amazon, because it is the traditional shopping season. With more and more calls for liberalizing epidemic management policies, the recovery of offline business will deepen in the future, which will affect online business more or less.

In addition, the provision for credit losses is not optimistic.

In the past years, economic is in ease time. The Federal Reserve has low rate and the US government sent a lot of money, which has made Americans "payable".

With the higher CPI, Federal Reserve is going to raising interest rates urgently, so did fiscal policy to be tighten, which will make credit losses worse.

The way of "use first and pay later" is more likely to bring credit losses, and if these potentially defaults are packaged into synthetic products, It may even lead to problems similar to the subprime mortgage crisis.