Updated: Feb 13, 2021
James Chapter 4 verse 10 states, "Humble yourselves before the Lord, and he will lift you up."
I think that the saying "pride goes before a fall" is very telling. The second, I become arrogant or prideful, I know I'm in trouble, as I tend to let my emotions get the best of me. At the same time, when I practice being humble, I find that it allows me to look at varying degrees of success, and still scrutinize on how to improve it.
For investing, being humble is highly important. It is most important to counter confirmation bias. As my investments continue to do better and better, it becomes increasingly easier to simply assess information assuming that what has worked in the past, will continue to repeat. The best way that I look to avoid this, is to use the objectiveness of fundamental analysis. If the story the numbers are telling weakens, then it's time to reassess the thesis. This brings me to Affirm Holdings (AFRM) earnings report earlier today.
Affirm is looking to target consumers through a more efficient and more transparent process to make payments on goods. Specifically, the company provides a deferred payment approach with lower rates with no hidden fees or late fees. Consumers are able to use the app to manage payments, open a high-yield savings account, and access a personalized marketplace. For merchants, Affirm is focused on commerce solutions to increase demand and customer acquisition, among other services.
Affirm's key financial metrics as of today's filing and on a Last Twelve-Month, LTM, period are as follows:
Net Cash Position: $1.8 billion
Revenues: $670 million
Gross Margin, GM: 91%
Operating Cash Flow, OCF / Margin: ($87) million / (13%)
Free Cash Flow, FCF / Margin: ($65) million / (10%)
Shares Outstanding 246 million
Merchant Network Rev: $345 million
Virtual Card Network Rev: $25 million
Interest Income: $230 million
Gains (Loss) on Sales of Loans: $52 million
Servicing Income: $17 million
Gross Merchandise Volume (GMV): $6 billion
Active Customers: 4.5 million
Transactions per Active Customer: 2.2
Total Platform Portfolio: $3.7 billion
Affirm's fiscal year ends every June 30th. With the December quarter serving as the fiscal year's midpoint, Affirm witnessed Revenue growth of 73% for the first six months of the year. GM increased by 100 basis points, however, both OCF and FCF margins and nominal values remain negative. The good news is that the negative OCF margin has dropped from (41%) to 2018 to (13%) currently.
For many, a 73% growth rate for Revenue over a six-month period sounds spectacular. However, this is a deceleration from the rate of growth Affirm achieved during its first quarter, which was at 98%, meaning that the second quarter only grew 57%. Quarterly Revenue growth has fluctuated over the past couple of years, but this is the slowest growth rate since the September 2019 quarter at 69%.
The key Revenue growth drivers are Merchant Network Revenue and Interest Income. Similar to total Revenue, these have fluctuated on a quarterly basis, with the December quarter Merchant Revenue declining, while Interest Income increased. Based on the review of Revenue performance, investors should continue to expect Revenues to fluctuate each quarter.
GMV growth from last year was more stable at 62% during the quarter and 64% over the first six months. Revenue as a percentage of GMV increased by 20 basis points to just over 11%. The company is estimating GMV at $7.4 billion and Revenues just below $800 million. Investors should recall that Affirm has partnered with Shopify, Inc. (SHOP) and Split Pay, and as a result of these partnerships, the company has stated that it may lead to lower average order value, AOV. Looking at the high-end estimate for the year, Revenue as a percentage of GMV may fall as much as 500 basis points by fiscal year 2021 end.
Key updated valuation metrics for Affirm include:
Enterprise Value, EV: $34 billion
EV/Revenues: 51 times
Net Debt/OCF: N/A
Stock Price, SP/OCF per Share: N/A
Affirm is interesting as analysts were scrambling to get their PTs out before earnings this week. Seven analysts started coverage with Goldman Sachs having the lowest PT at $95 and Truist having the highest at $160. The combined average for the week was a PT of $126. Affirm is trading with a steep premium at 51 times EV/Revenue. With no Cash Flow, there's no way to analyze performance yet.
After these results, I'm inclined to reduce my initial PT just below $170 per share to $144 over the next 18-month period. I am assuming that Affirm may come in higher for its GMV in 2021 towards $7.6 billion and eclipse $11 billion for 2022. With lower AOV leading to a sub-11% Revenue percent of GMV, I am updating my 2022 Revenue model to $1.1 billion, down from $1.5 billion. I am modeling Cash Flow inflection towards 5% for 2022 and a 700 times OCF/share multiple, with an EV/Revenue multiple at 35 times.
A company like Affirm will likely continue to see lumpy Revenue performance over the near-term. What I will continue to focus on is the company's GMV growth rate, since new partnerships with Shopify and likely others, will look to keep this core metric growing. Monitoring Revenue as a percentage of GMV will also be very important to drive expectations. Longer term, I still think that Affirm has a very interesting business model and large addressable market and runway.