Business Breakdowns
· Fraser
And, recognition where it's due, Klarna has a much stronger international business with a very large merchant and consumer base, and they've built a great payments network in this international region. But what's interesting is Affirm is getting pulled into these international markets by its existing US merchants, whether that's Shopify or Costco. Some of their largest partners, I think, see the value of the broader suite of credit products and want to bring them into places like Canada, the UK, and Australia. The international business in and of itself is interesting just as a driver of growth in its own right, but it's actually, in our minds, strategically very important to continue winning businesses with US merchants. There are examples of merchants with global footprints — and I'll pick on an Airbnb or eBay — that actually went with Klarna globally because they just wanted one button to hit a global customer base. And today Affirm can't really do that. Over time, as Affirm opens in more regions, we think that head-to-head on Klarna for some of those merchants actually gets stronger, so that there's no reason why anyone shouldn't go with Affirm. Because you can imagine, at the end of the day, if you're a US-only merchant, Affirm — the network effect is basically subject to the economics not being wildly different. You generally prefer to pick the platform with the most users, because it's going to result in the most transactions. The same is true globally. So if you're a global business, it's hard not to pick Klarna today, because there's so many regions where they have a large customer base and are going to result in more transactions. Over time, we think that'll change, but that's why the international business is important to build, even though I think some investors would be skeptical that that market is saturated and maybe there's no point going after those markets. Those three buckets are what's in the actual greater-than-25% growth, $100 billion of GMV. The business was then very deliberate and specific that Affirm Edge and agentic commerce were incremental products to that growth. And so Edge is the white label for regional banks, and then agentic commerce will involve a myriad of things, from personalized offers through to direct integrations with personal agents, as well as AI more broadly through the business.
· S0
[00:00:00] S0: When you speak to skeptics of Affirm, what are they most worried about? Is it mostly just around the concentration risk, which seems to have been mitigated to some extent, even when you lose a player like Walmart? And maybe they had high volume, but it wasn't super profitable, so it didn't make such an impact to the business. But in general, I think the numbers are pretty concentrated across the top five, and then even Amazon being the number one, which is over 20% of the business. How much of it is just around concentration risk? Obviously interest rates have an impact too, but we covered that. Maybe hit on concentration risk and any other significant risks to the business.
· Fraser
[00:00:00] S1: We're not strictly bank investors. We're more founder-led growth investors. When we speak to our network, the number one thing people worry about is that they're just not comfortable with credit businesses — that it's just too hard, requires too much work, not in their circle of competence. The issue is not so much firm-specific as it is just where they play. I think there's also a lot of misconceptions. We speak to a lot of investors that still say, "Oh, they're just lending to subprime customers that can't otherwise get credit cards. It's a hypercompetitive industry. What's the competitive advantage?" And what's interesting is it was very similar with Afterpay in Australia. The investor community was generally very dismissive of Afterpay when it was listed here because, again, their personal experience, our personal experience, is very different to the types of customers that use Affirm. We're typically not sitting on revolving credit card balances, and we're typically optimizing for points and travel and airport lounge access. And so the counterposition of Affirm versus a credit card isn't obvious to us in the same way it is obvious to the average American, who actually just wants to get a great offer and not end up trapped in a credit card debt spiral. The pushback is actually normally based on some of those aspects. The concentration piece we've talked about — it can be offset. It obviously hurts the customer acquisition flywheel if an Amazon or a Shopify were to churn. No doubt there are very long-term agreements in place with both of those companies. You can imagine — Max and Tobi, I understand, are reasonably close. There's reasons why those partnerships have been very successful for all the players. So it would surprise us if those relationships were to end, but it obviously is a risk. We've talked about the capital markets side and interest rates. You just see it in the stock price very clearly. Anytime there's a Wall Street Journal article that private credit are gating funds and potentially imploding, the stock is down. I think it's one of those businesses where, when things are going well, you get a lot of growth investors involved. When things are going not so well, all the bank guys turn up. And so there's this constant tension of: should it trade on ten times P/E? Should it trade on 20 times P/E?
· Fraser
The growth investors haven't necessarily done a whole lot of work to get really comfortable with the credit. And so anytime there's a risk, they're straight out. But similarly, the bank guys don't necessarily value a founder-led, tech-native business — those aspects of the culture and the organization — the same way the growth guys do. So in the same way people were arguing for many years, "Is Amazon a retailer or a tech business?" I think people today argue, "Is Affirm a lender or a tech business?" And the answer is both, and it's important to understand both aspects of the business. There's all the games of how quickly do consensus estimates come down and all those sorts of things, but really, during a really, really bad interest rate hike cycle, it was one quarter where you would've looked at each other — "Is this business about to implode?" And then the next quarter it got better, and by the following quarter you were back. So when you look through the history and study how the business self-healed through that process, I think you can get comfort on the credit. Not to say the share price won't get hurt if there's major interest rate hikes, but it's not an existential risk, I think, the way some people would otherwise think of it.
· S0
[00:00:00] S0: I hope people can appreciate the resiliency of this company, and of Max, and of the team, because, as we talked about, it could have died so many different times, and yet it's still here and growing very fast, with a leadership position, particularly in the US, and with plans to expand globally. I often like to close with a lesson for founders building a company today, and I think we covered that today with HVF — do things that are hard, valuable, and fun. That's Max's way. And so maybe the last question can be for investors: what's the lesson from studying and investing in Affirm?
· Fraser, S0
[00:00:00] S1: We love these businesses that are tech native but operating in what I'll call non-tech industries, when they can merge a cross-section of the talent. So in Affirm's case, they have serious underwriting talent, but they've also got serious engineering talent. And so you merge all the best things about a tech company with all of the complexity of a real-world operating business. And that gives you a competitive advantage that can't be built by Claude Code, frankly. And we could run through a list of businesses that we think fit in this category, but Affirm is clearly one of them. The biggest businesses in the world, whether that be Google, Amazon, Apple, Shopify, have absolutely no interest in extending credit to their customers. They outsource it. It's hard and requires a lot of expertise, and they have core businesses to run. And so Affirm has been able to build its competitive advantage by marrying its tech talent and its underwriting talent. And that gave it a competitive advantage previously, before AI became a huge factor, and we think a competitive advantage in this new environment. [00:00:00] S0: Awesome. Fraser, thank you for your time. [00:00:00] S1: Awesome. Thanks for having me.