Affirm Holdings - A Fintech Winner

Galatians Chapter 6 verses 7-8 state, "Do not be deceived; God cannot be mocked. A man reaps what he sows. Whoever sows to please their flesh, from the flesh will reap destruction; whoever sows to please the Spirit, from the Spirit will reap eternal life."

I think most people recognize the term a man reaps what he sows. But flesh and Spirit, what does this mean? My flesh is what I was born with, literally I am made up of materials. But my Spirit, this comes only from God. If I choose to live my life for my own selfish desires (my flesh), then the Bible tells me that I am a fool and will reap destruction (eternally in hell). But if I choose to live my life for the Spirit, which is seeking a relationship with God, then I will reap eternal life. The only way to accomplish the latter is through Jesus Christ, my Lord and Savior.

For investing, I think that the term a man reaps what he sows is also true. I talk stocks a lot with family, friends, random people I meet all over the place, etc. And the one thing I hear over and over is a quick idea to buy a stock, without really thinking it through. Far too often, its easy to look for the next best thing. But to truly invest for success over time, it takes discipline and a lot of commitment. I don't for one second think that I can pick winners for the sake of picking them. I know better, as winners and losers exist, so I take my investing approach extremely seriously as over time, every holding in the portfolio is going to end up becoming one or the other.


Affirm Holdings (AFRM) was a big winner from today's rally for many aggressive growth peers. After the company's earnings report, the stock skyrocketed even higher finishing after-hours up over33%. The Fintech world has quickly been one of the hardest hit areas of the stock market. This has led me to tighten up the portfolio's explicit Fintech holdings to two; AFRM and Coinbase Global, Inc. (COIN). AFRM's results are a clear indication that it is a Fintech winner, poised to do very well over the mid-- and long-term.

Key Takeaways

AFRM has been witnessing substantial growth in GMV as the company has an exclusive agreement with Shopify, Inc. (SHOP) and has recent partnerships with Apple, Inc. (AAPL) and Amazon, Inc. (AMZN) (exclusive as well). But that's not it as AFRM has continued to grow all over the place with other partners like Walmart, Inc. (WMT) to even, dare I mention, Peloton Interactive, Inc. (PTON). The point is, the company is dynamic and becoming well integrated into payment system options at the largest retailers out there. So what gives?

Recently during AFRM's first quarterly report after the AMZN partnership announcement, the company witnessed a drop in Revenue as a percentage of GMV. This led Wallstreet to further question AFRM's business model as they were expecting Revenues to grow further as GMV was being anticipated to accelerated. This was a core reason why the SP dropped from the over $100 level back towards the $50 level.

Rather than worry about Wallstreet's concerns, I find it more useful as an investor to deconstruct the approach of AFRM's business. AFRM is looking to gain consumer trust through offering truly transparent financial products, while integrating itself as the necessary platform to bridge the BNPL payment needs of consumers, with the thousands of merchants offering them products. This doesn't sound special, but it is, as many legacy financial institutions do not do what is in their customer's best interest. They simple don't care and Fintech is going to take advantage of this.

AFRM's dynamically adaptive check-out solutions, bi-weekly or monthly BNPL payment options side-by-side as an example, is a direct way that the company is adding value to a single integrated checkout. This may sound basic to the average person, but these types of solutions are not what major credit card companies or banks are looking to provide consumers.

AFRM's core objective is straight forward, expand and grow scale at a rapid pace, and then turn on the Cash Flow Margin. Wallstreet has always questioned the company's GMV potential. Now it is clear that AFRM is headed towards $40 billion and higher. Wallstreet has then pivoted to question AFRM's Take Rate. But AFRM isn't interested in the short-term Revenue Take Rate as The company is focused on Revenue Less Transaction Cost, which has been higher thus far versus mid- and long-term guidance (3-4%).

The renewed multi-year exclusive agreement with SHOP is huge as it is a testament that SHOP values AFRM's platform and benefit it brings to SHOP's customers. This is precisely the game plan for AFRM and the opportunity with other partnerships like AMZN. To continue to scale with top merchants and sustain business long-term as their platform integration becomes essential to the merchant customer relationship.

Why it Matters

It matters because the Fintech industry is very challenging to get a handle on. We've got SoFi Technologies, Inc. (SOFI), Robinhood Markets, Inc. (HOOD), Bakkt Holdings, Inc. (BKKT), Marqeta, Inc. (MQ), Paysafe Limited (PSFE) and many other newcomers. I've analyzed all of these companies and one-by-one, their weaknesses were clearly pronounced. Weaknesses have ranged from growth-by-acquisition red flags, poor execution, unclear competitive advantages, to simply weak management. Not all of this group will be poor investments, as some still have robust potential.

It is always important to pick winners when attempting to invest in stocks individually. During broader market cycles that are positive, it's very easy to pick a subpar company and still get a good return. I'm not so certain that this strategy will lead to success over the next decade. AFRM is a Fintech winner for multiple reasons - 1) management and human capital are a strongpoint against many other peers 2) the company is proving right now that their GMV potential is massive 3) management is now guiding for profitability mid-2023 that will be sustainable suggesting that scale will lead to much stronger economics 4) Further integration into the check out payment side will make AFRM all the more necessary for merchants and customers alike.

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