To The Moon

$Affirm Holdings, Inc.(AFRM)$ $Invesco QQQ Trust-ETF(QQQ)$ $NASDAQ(.IXIC)$ 

Affirm is a leading player in the fast-growing "buy now, pay later" (BNPL) space, which provides consumers with an alternative to traditional credit options, such as credit cards. By offering flexible, transparent loan options that can be paid over time, Affirm aims to make it easier for consumers to make purchases and manage their finances. The company's strong reputation and partnerships have helped to drive significant growth and increase its market share. While under the current environment with rising interest rate and weak macro economy, AFRM's business model makes it more exposed to credit cost due to its low-quality customer profile and rising funding costs.

Investment Overview

Leader in BNPL business. Affirm's position as a leader in the BNPL space is driven by several factors, including its innovative technology platform, its partnerships with leading merchants, and its commitment to providing a user-friendly experience for both consumers and merchants. Going forward, Affirm's strategy will likely focus on expanding its reach and partnerships, investing in technology and innovation, and expanding its product offerings and entering new markets to continue its growth trajectory.

Revenue growth slowing down. AFRM offers consumer loans, virtual credit cards, and point-of-sale financing solutions for online and offline retailers. Due to the Fed's higher-for-longer interest rates, AFRM's revenue has been slowing down due to uncertainties in the consumer spending landscape. Market consensus expects AFRM's revenue to grow by 26%/20% y-o-y in FY24F/25F, respectively, lower than the growth rate of 55%/34% in FY22/FY23.

Profitability vulnerable to rising credit costs and funding costs. AFRM's profitability is more vulnerable to the impact of rising credit costs resulting from deteriorating customer credit profiles and rising funding costs due to the tightened monetary policy during the current recession cycle, the credit costs and funding costs substantially increased by 55% and 195% y-o-y in FY1Q24, respectively.

Upside risks include consumer credit quality improving faster than expected, consumer demand for unsecured loans improves despite a challenging environment, and less pricing pressure.

My valuation is higher than that of its BNPL peer ZIP, which is traded at 3.7x FY24F forward EV/Sales, on the back of Affirm’s stronger growth prospects in FY23-25F, driven by expanding partnerships with key merchandisers and more diversified funding sources.

But the near term outlook looks bleak given the weakness in the global economies. This will likely impact its earnings.

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