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$AFRM Investment Thesis
Summary
- Affirm is a consumer loan company which offers instant loans inside of E-Commerce Point-of-Sale systems. Affirm came out of the Startup Studio HVF.
- The company is riding major industry trends with it's "sell shovels" strategy, and by integrating at the POS layer it can benefit from the popularity of all major online retailers.
- Competition does exist, but Affirm has first mover advantage and a unique product offering. Their biggest risk is social media platforms launching their own fully integrated payment systems with play later functionality.
Opportunity
- Selling shovels: Affirm has partnered with Shopify and BigCommerce to offer retailers easy payment options on their websites. By integrating at the POS, Affirm can ride the trend of E-Commerce and online retail without having to compete in that crowded space.
- Alternative Credit: Affirm offers an alternative to Credit Cards. Instead of buying an entire thing with credit, Affirm lets customers make smaller monthly payments on the item with cash. Customers can use these services without any impact on their credit score.
- Trends: Forrester reports that just 26% of retailers offer installment plan options at checkout. There's lots of headroom to grow here. JetBlue recently partnered with Goldman Sachs to offer pay later financing on airline tickets recently.
- First Mover Advantage: While competition does exist, and other online retailers/social media platforms/credit card companies might launch their own competing product, Affirm is ahead of the pack with first mover advantage.
Risks
- Competition does exist, both from direct startup competitors and future moves from social media giants and online retailers themselves.
- Afterpay Ltd offers layaway for online retailers and plays in the same "pay later payments" space. It saw a 219% YoY growth between 2019 and 2020. Between that time, 20,000 people downloaded their mobile app per day in the US (for an undisclosed period of time).
- QuadPlay is a company acquired by Zip Co, an Austrialian FinTech company. They offer a mobile app customers can use to purchase anything from any retailer in 4 payments. QuadPay acts like a virtual credit card, and requires a credit check before being able to use it.
- Klarna is a direct competitor to Affirm. Their payment option can be integrated with online retailer's POS systems. Klarna offers customers the option to pay for something after 30 days, but can send the item back (for free) if they can't pay in 30 days. Klarna also offers a 36 month installment plan, but this requires a credit check and is essentially a Credit Card.
- Credit Card companies like Chase Bank or American Express. They've recognized the threat and are now allowing customers to convert purchases into installment loans after they make the purchase (provided it's over a certain amount). This isn't convenient, but a company like Apple could make it work nicely with their credit card and wallet app.
- PayPal is expanding into the Buy Now Pay Later and POS Lending market. They also have a large merchant network in the E-Commerce space.
- Social Media platforms like Instagram or Pinterest who have experimented with in-app E-Commerce. They could offer in-house pay later products or other Financial Products. These companies also have direct access to influencers who can influence consumers to use pay later services.
- Regulation - As with all FinTech companies, regulation is a risk with Affirm. Perceived predatory lending practices (making it so easy for someone to take out a loan with limited credit checks) could bring about new regulation.
- Peloton: Represents 30% of all revenue. Huge dependency on a single customer, so diversification will be key in the future.
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