Business Breakdowns
· Fraser
[00:00:00] S1: It's an education process, and it also occurs industry by industry. So what do I mean by an education process? There are many businesses that just view card acceptance as a cost. How do I lower that cost? How do I have Adyen and Braintree and Stripe beat each other up so that my processing costs are as low as they can possibly be? And they don't necessarily view it as a strategic lever to drive— so it's an education process to say, integrate Affirm into your checkout. We show all these various offers. The cost to the merchant can vary considerably. For an interest-bearing loan, the MDR the merchant pays is kind of similar to what they would pay for a card transaction. But if there's a 0% loan that's merchant-funded, that can be high-single-digit MDR. And so some merchants look at that and think it's an excessive and totally unnecessary way to drive revenue. But what Affirm would say is, well, you can either do a 20% storewide sale, and every customer that turns up is getting a discount, and it's lower gross margins on all those sales. And you have a bunch of customers that otherwise would've paid full price that are now getting a discount. These 0% APR loans are a clever way to effectively discount, but do it on a personalized basis, customer by customer. And so when you think about that phased approach to discounting, particularly for a fashion business over the life of that season, maybe you start with the 0% loans to help move some volume and then end up in the 20 or 30% discount. Affirm tries to educate merchants on the strategic merits and the strategic value, but it just takes time to win those merchants. You do see it also happen industry by industry — all of a sudden, once Amazon launches Affirm, and this happened in 2020, 2021, a lot of other e-commerce players then follow very, very quickly, because they realize, "Hey, the biggest business has decided this is a valuable tool. We don't have to overthink this. Let's integrate." And so it's the ground game of going industry by industry, business by business, and educating them on the merits of the product. We would love it to be faster, but that's the process.
· S0
[00:00:00] S0: Do you have a sense of churn — maybe the traditional sense of churn, which I assume would be pretty low because it's just another option that's available at checkout? But at the same time, you can see companies, some very big like Walmart, try to do this themselves and move off of Affirm. Also notably, it cuts the other way, where Apple tried to do this — I think it was Apple Pay Later — and they sunsetted that because the underwriting side is actually very, very difficult. They went with Affirm. I think they integrated Klarna as well. So maybe talk about that side of the business, people maybe trying to build it on their own, or just overall churn for Affirm.
· Fraser
[00:00:00] S1: The way the company thinks about churn and engagement over time is more on the consumer side, so I'll share some of those stats. But basically what you see is cohorts steadily expanding over time. They initially start typically purchasing through Affirm offers twice per year. A few years ago, the average was a couple of times per year, and today the average transaction count is about seven times per year. So you can see that when consumers join, they typically increase their usage of the product over time. So the consumer value prop is very clear. The customer churn piece is interesting. I don't have the specific stat off the top of my head, but it's very, very low. And Walmart is the recent exception. Basically what happened is Walmart turned off Affirm and turned on its own OnePay, powered by Klarna, buy now, pay later offer. What is interesting is the economic impact to Affirm was actually quite minimal, for two reasons. The first is that wasn't a very profitable merchant. You can imagine Walmart beats their suppliers up on terms, and so it's not particularly profitable despite being a lot of volume. So what you do lose is the CAC, but again, a powered-by-Affirm white label of a Walmart digital wallet is less exciting from a CAC perspective. The other interesting thing, though, which the company recently disclosed, is — and I think they use the words "large majority" — customers that were shopping with Walmart are still shopping with Walmart by Affirm. They just use the card. So they still prefer Affirm. They still have loyalty to the brand. So they've got access to the Affirm card, and they pay with the Affirm card and select the interest-bearing loan or the offer that best suits them when they're shopping either in store or online with Walmart. There's some interesting nuances, and I think people probably thought the Walmart churn was going to be worse than the reality actually was.
· S0
[00:00:00] S0: We talked about COVID, which is when they went public in 2021, and they went through this wild ride of — I think the market cap doubled on the first day, and then after some period of time, macroeconomic changes impacted the business. Peloton's stock and business cratering also had a very heavy impact. I think the stock went down 80%, 90% plus, but there's such a resiliency part of the story, and a lot of that probably has to do with Max and the people leading the business. I know we talked about some numbers earlier — it's growing on a much larger base — but maybe give us a sense of how big is it? How fast is it growing? Is it profitable?
· Fraser
[00:00:00] S1: The journey has certainly been wild. I think it listed at about $49 a share, closed day one almost $100 a share, got to about $175 a share a year later, and then bottomed during the rate hike cycle at $9. So more than 90% drawdown, Max's LTI massively underwater. Brokers are piling on with sell ratings and price target downgrades. I can imagine that would've been a very, very tough time for the business, to go from a market darling in that class of 2020, 2021 IPOs to where they were during that period. But roll forward a few years, and today the share price is back to about $60 to $80, depending on the day. It's about a $25 billion market cap business on a fully diluted basis and trades at about 20 times adjusted P/E — I'm stripping SBC out of that number. GMV is about $50 billion, growing 30% a year, and they generate revenue less transaction costs, RLTC, which is effectively gross profit, of about $2 billion a year. And so that's the rough shape and size of the business as it exists today. When you go back through the case study of the share price journey that the business has been on, it was obviously overvalued in those early years. The big part of the share price decline is going from 20 times revenue to 20 times P/E. When you actually look at the rate hike cycle and the impact on the business, it was actually only one quarter, the December '22 quarter — we weren't shareholders at the time and weren't following the business closely, but looking back at the trajectory of the business, as a long-term shareholder, when that result printed, it would've been reasonably terrifying. Growth slowed dramatically, margins were down materially, and it felt like the numbers were in freefall. But by the next quarter, it had already inflected and margins had improved materially. And then the following quarter, both growth and margins were reasonably healthy.
· S0
[00:00:00] S0: Revenue less transaction costs, which is their version of gross profit, is something that management talks a lot about. Are there other specific metrics that are important to understanding Affirm as a business, whether it's relative to other businesses or just independently? What are the things that you guys care about and see that are improving or accelerating over time?