Major takeaways:
1.5% write-off rate for their jan 2020 vintage is very healthy - comparable to the long-term trend for unsecured superprime consumer debt. Given the (I suspect) lower average creditworthiness of Affirm customers, this is a great number. I'd be curious to see their long-term trend for same-age vintages, however. In consumer credit it's well known that all the stimulus support in 2020 has significantly depressed defaults. It would be interesting to see if this is a fluke, or if this is actually what their charge-off rate actually looks like in a normal environment/part of a bigger trend.
I'm a little skeptical of their claim to use ML & build a data moat for significantly better underwriting decisions. Consumer credit laws in the US so severely restrict what you can use for credit scoring purposes that better underwriting through data is basically a lost cause, absent some specific customer segment that has special credit situations.
Finally, as others have noted, 30% of revenue just from Peloton is an enormous number.
It seems from the S-1 that Affirm has grown it's market quite a lot, but my first and primary exposure to them is in the car scene. Affirm entered this customer segment and dominated pretty quickly as the creditor integration of choice for long time-scale projects with up front costs like custom engine builds. I imagine to some degree they are able to make decisions partly based on the nature of what is being purchased.
Their S-1 indicates this is shifting, but I have historically seen Affirm in places where a more typical online consumer credit organization like PayPal Credit / BillMeLater / etc doesn't play. Affirm seemed to be focused on larger sized purchases which would otherwise be paid on an installment plan, but filling that gap. Exercise equipment like Peloton is a great example, just as engine builds is a similar type of transaction.
So really it's a great way to take advantage of the credit markets and public company comps being extremely high while benefitting the customer.
Can I inquire what your background is or where you found that information? Many companies supplement credit scores with additional data to make these types of decisions.
| 2019 | 2020
------------|--------|--------
net revenue | $264 | $509
op ex | $391 | $617
net loss | $(120) | $(113)
loss ex SBC | $(79) | $(83)
volume | $2,620 | $4,637
customers | 2.05 | 3.62“Our top merchant partner, Peloton, represented approximately 28% of our total revenue for the fiscal year ended June 30, 2020 and 30% of our total revenue for the three months ended September 30, 2020. Our top ten merchants in the aggregate represented approximately 35% of our total revenue for the fiscal year ended June 30, 2020 and approximately 37% of our total revenue for the three months ended September 30, 2020.”
“For example, the significance of Peloton in our portfolio has increased as a result of consumer spending trends on home fitness equipment, and there can be no assurance that such trends will continue or that the levels of total revenue and merchant network revenue that we generate from Peloton will continue. The loss of Peloton as a merchant partner, or the loss of any other significant merchant relationships, would materially and adversely affect our business, results of operations, financial condition, and future prospects. In addition, an anticipated material modification in the merchant agreement with a significant merchant partner could affect the results of our operations, financial condition, and future prospects.”
I just went through the Peloton flow to see for myself and indeed there's a 0% APR option for 3 years so it's clearly being paid for by Peloton.
It also explains to me why people might choose to use Affirm even if they could afford the upfront cost.
It's a really great deal as a consumer.
Affirm takes what would be a ~$600 or $2000 credit card transaction and turns it into a series of ACH payments. If (cost of ACH + cost of underwriting) < (cost of credit card merchant fee) then the merchant and affirm can split the difference.
I don't see it as a problem because all of these companies have legitimate products/services, legitimate customers and legitimate cash flows. This isn't another dot com situation we are in. There are very few companies going IPO with just an idea. ("we're going to use the proceeds from this offering to build an online pets store called pets.com")
It is easy to say "its the stimulus" or "its the fed" but I think there is more going on at a fundamental level.
Before: Alice wants to buy a chair that costs $100 from Bob. Alice saves $10 a month and buys a chair. Bob got $100. Alice can buy a new chair every 10 months. She may also conclude after 10 months, that she doesn't want the chair that badly, and would instead save the $100 for retirement, or pay it into the house mortgage, reducing the amortization by a week.
Now: Alice wants to buy a chair from Bob. She gets a loan, paying $10 over 12 months. Bob gets $100, Affirm gets $20. Alice can now buy a chair every 12 months. Affirm's founder buys a supercar.
Slightly later: Alice's job gets cut due to COVID. She can now only pay $5/month. She gets a $100 stimulus check, but instead of paying off the chair, she buys Affirm stock and remortgages the chair to 24 months. Now Affirm gets $40 in interest and $100 in fed money routed through Alice.
Net effect: Alice's purchasing power has reduced 2.4 times, Affirm's founder buys 50 new yachts and starts a company that lets people get loans to buy food.
Or lets look at doordash [1] despite the pandemic and most of its workers not being employees(low paid gig workers) it is still losing money at an astounding rate: $533M last year and with a pandemic bump of only a 149M loss this year so far(it expects orders to slow alot after the pandemic).
I feel like I am Michael Burry in the big short playing my drums pointing out the obviousness of the huge crash that is coming with alot of these companies. What is scary is alot of americans and foreigners for that matter have their retirement savings(401k) tied up into these mini-titanics. When the fed's tap gets turned off, expect a reckoning.
Affirm is effectively a broker for loans issued by Cross River Bank
Good for them, I'll be buying shortly after their IPO.
The PoS thing i am talking about was even before ecommerce was common was mostly decentralized through the seller. Overtime, banks started getting into this niche, and when you were paying with credit card, they offered you installments usually at 0% apr for few months. Eventually this moved to e-commerce with websites offering similar payments.
I also sort of remember in the US some credit cards (probably chase?) offered installments after you pay for the item - you'd login into your account, and pick a purchase to pay over time.
Aside from those, they could be a really attractive business.
"diverse set of capital partners"