Affirm - Buy-Now-Pay-Later Is The New Normal

‘As you do not know what is the way of the wind, Or how the bones grow in the womb of her who is with child, So you do not know the works of God who makes everything.’

Ecclesiastes 11:5

This verse is all about God’s authority being supreme. The message of Jesus of course is love, I must love God with all that I have, and I must love others. However, when I think that I should know everything that there is to know about life and why things happen the way that they do, I am reminded that there is far more that I cannot grasp and that God’s sovereignty is far greater.

How is God’s sovereignty associated with investing. It boils down to my selfish or emotional desires and tendencies versus obeying God’s commands that are applicable to everything including investing. There are many uncertainties associated with investing that translate to risk and management strategies. While well intended, these structures are not without bias and self-fulfilling motives. Like I must accept that God is all-knowing while I am limited, I must equally accept that one of the biggest challenges throughout my investment path is going to be myself.

Affirm Holdings, Inc. (AFRM) has stepped in at the right time to serve as a buy-now-pay-later, or BNPL pure-play. The combination of severe inflationary pressures in the past three years has led to increasing credit card debt to support consumer spending habits. The BNPL brand serves as a compliment to sustaining the instant gratification lifestyle that most Americans have become accustomed to.

The company has greatly benefited from its arrangements with Amazon, Inc. (AMZN), and Shopify, Inc. (SHOP). Having these partnerships with two companies generating over $1.1 trillion in GMV and becoming more engrained into these transactional ecosystems has benefited AFRM quite well. AFRM has witnessed expanding revenue as a percentage of GMV stemming from continued shifts in network revenue versus interest income and loan sales.

For investors, the key is understanding the relationship to AFRM’s GMV versus net revenue and recent cash flow inflection. AFRM’s overall GMV is a product of active consumers and the average transactions that they make to get to total transactions. The average transaction spend per consumer has continued to drop, although the rate of decline has slowed. This serves as the combined GMV, while AFRM's net revenue mix fluctuates as a portion of GMV.

AFRM will continue to have a long runway to expand BNPL within e-commerce transactions across its partners. The company’s cash flow has inflected from a negative margin as of 2022 to a 26 percent margin currently, and there is potential for further margin expansion. AFRM is valued at a very reasonable level based on its cash flow multiple and this sets investors up for continued robust gains over the mid-term.