Business Breakdowns
· 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?
· Fraser
[00:00:00] S1: Definitely. Max is reading scientific papers late at night on AI. We caught up with Max a few weeks ago, and he said one recent weekend he used AI to build an app to control all of the TVs and stereos in his house because he was sick of hunting around couches for remotes. He's an engineer. They are extremely technical. 70 or 80% of code is already being deployed by AI. You compare that culture and that leadership team, how AI-pilled they are, with every other credit card business on earth — it's just not a fair fight or a fair comparison. The reason we back founder-led businesses is this alignment piece, because the founders are economically tied to their businesses and care deeply about pursuing growth opportunities and taking advantage of big transformational innovations like AI. Just for context, Max's salary is less than $40,000 a year. He earns no cash bonus, but he owns a couple of billion dollars' worth of stock and does earn an LTI of stock that's tied to the financial performance of the firm. And interestingly, the two presidents of the business — to your point on longevity of the team — those two presidents have been with the business eight to ten years, and they each own $100 million of stock plus, which is more than most CEOs of US public businesses. So the alignment is there through the organization and starts with Max. They've even recently made some org design tweaks so that Max is now spending more of his time in what he's calling his innovation lab in Affirm. And so the two presidents effectively run the day-to-day of the core business, and then Max has a small team of engineers and product people to build the next suite of growth levers to layer on top of what already exists in the business.
· S0
[00:00:00] S0: This is like the zero-to-one idea that's inside the business, and Affirm Card is kind of spun out of it.