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With Affirm, All They Want Is Growth

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·4 min read
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  • AFRM
  • FIS
  • V
  • SHOP

Affirm Holdings (NASDAQ:AFRM) stock skyrocketed overnight after earnings showed the company has what every investor wants, super-fast growth.

Affirm (AFRM) logo displayed on a smartphone
Affirm (AFRM) logo displayed on a smartphone

Source: Piotr Swat / Shutterstock.com

Fear about those earnings sent shares down to $133.53 on Nov. 10. But great numbers sent shares up to nearly $170 in overnight trade.

Affirm said it lost $306.6 million, $1.13 per share, on revenue of $269.3 million for the three months ending Sept. 30 with AFRM stock. But that was 55% ahead of a year ago.

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More importantly, gross merchandise volume, the value of transactions where Affirm’s buy now, pay later platform was used in payments, rose 84% to $2.7 billion.

Support from Shopify (NASDAQ:SHOP) was credited with taking the merchant count to 102,000, from 6,500. The number of active customers grew 1.6 million in just one-quarter, and 8.7 million year-over-year.

Processors and Banks

Affirm grabbed $42.2 billion in market cap, while shares of the credit card processors it competes with continue to crash. Fidelity National Information Services (NASDAQ:FIS), which traded at almost $150/share in June — was at $118 on Nov. 10. Fiserv (NASDAQ:FISV), a $125/share stock in April, is now at $100. Even mighty Visa (NYSE:V), worth $249/share in July, is now at $216.

Processors are down because Affirm transactions cut them out of the loop. They not only lose processing revenue, but the float that comes between someone using a card and the transaction’s settlement. This isn’t stopping their growth. FIS revenues should be up 8% in 2021. But it’s a slowdown, and investors are buying trends.

They’re certainly not buying value. At its Nov. 11 opening price, Affirm was trading at over 50 times its 2021 revenue with AFRM stock. And as previously noted, it’s not yet profitable.

Just as important is what Affirm’s growth implies for banks such as Capitol One (NYSE:COF). Credit card banks make enormous float off the stored balances on their cards. When young consumers switch to buy now, pay later (or BNPL), costs are pushed onto merchants, who are taking bigger discounts on their sales in those transactions.

Merchants Want In

It’s merchant acceptance that is the key sea change. Along with its numbers, Affirm announced it will soon be the sole third-party, non-credit card BNPL platform offered by Amazon (NASDAQ:AMZN) in the U.S. This let Affirm raise guidance for the current quarter’s revenue by 10%.

Affirm CEO Max Levchin says the company will continue to stand on the customer’s side, eschewing even late fees. This stance has Bank of America (NYSE:BAC), which is also losing out on the trend, calling them the “clear bright spot” in the space. Downloads of Affirm’s app accelerated in September, the bank said, while downloads of rivals slowed.

But there are risks. Merchants like Target (NYSE:TGT), which expanded its deal with Affirm for the holidays, are accepting much less than full price for their goods. Affirm is also buying credit risk, which it’s offsetting by turning its loans into securities and selling them to private equity.

The Bottom Line

If you got on Affirm when it had its initial public offering (IPO) in January, with its initial price of $49/share, then God loves you. But growth on the platform may be peaking.

Visa is rolling out a plan called “Visa installments” to its processors and banks. MasterCard (NYSE:MA) said in September it will do the same thing. Square (NASDAQ:SQ) is paying $29 billion for Afterpay, another BNPL player, and there are others like privately-held Klarna and Sezzle (OTCMKTS:SEZNL) to contend with.

Then there’s just the law of numbers — as they get bigger, growing numbers gets harder. Affirm won’t have $1 billion in revenue this year, yet the market cap is pushing $47 billion. That’s a bubble in any language. If you’re interested in buying, let it settle first.

On the date of publication, Dana Blankenhorn held a long position in AMZN and BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

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