Business Breakdowns
· 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?
· Fraser
[00:00:00] S1: The big ones for us — we're obviously looking at GMV growth. We're looking at GMV growth ex-card. So how healthy is the core online business with direct merchant integrations versus the card business? The card business is fantastic, and it's helping to grow customer usage in the network, but that core flywheel still needs to be firing. It's important that that's firing for us. So GMV and the two constituent pieces are really important for us. The exact blend between the types of loans doesn't bounce around a lot and is somewhat less interesting to us. The gross profit, or the RLTC, is important because it captures all of the revenue of the business — so the merchant discount rates, the interest, the gain-on-sale piece — and then nets it off against the funding costs that they're paying on their debt facilities, as well as processing costs in terms of their customers paying back the loans, as well as all their credit loss–type costs. So it really captures that core economic engine of what dollar value is left for Affirm to then pay its corporate business in terms of sales and marketing, R&D, and OpEx. As I mentioned, we do benchmark that sales and marketing number compared to other fintech and financial services businesses, again, just to get a sense of: are these network effects real? And the answer is yes. We're really tracking the G&A, R&D, SBC, those sorts of line items, very closely. G&A has now been essentially flat in dollar terms for five years. SBC has essentially been flat in dollar terms for six years. And so where this was one of those classic Silicon Valley businesses that was a pretty egregious offender on things like stock-based comp when it first IPO'd, the levels it now reports are well and truly in line with even what the Mag 7 would report in terms of stock-based comp. So it's middle of the road. It's not offensive relative to plenty of other businesses that are out there. We do also obviously track credit losses and those sorts of things, just to make sure there's no material issues in the health of the business. But those sorts of things get more into the nuances. The core — how fast and how big is the network becoming — is where we're spending most of our time.
· S0
[00:00:00] S0: Inherently, in keeping G&A and headcount flat, it also means that you're not laying off people, which, presumably with a very technical team and a very tinkering mindset with AI, you may be able to lay off people, but that seems to be not his method or in his DNA. But Henry Ellenbogen, who came on Invest Like the Best, talked about Max — this being his act two — and that he gave a story where he would actually go to different departments and see how they were leveraging AI. Does that still feel true in the different methods of management and leadership that Max imbues?