Affirm Holdings - Following In PayPal's Footsteps?

He who follows righteousness and mercy Finds life, righteousness, and honor.

Proverbs 21:21

How do I find and follow righteousness and mercy? The first part of this Proverb is pointing me towards Jesus Christ. As a sinner, I cannot be fully righteous nor merciful and only through Christ can I begin to understand the gravity of what these words mean. As I see more clearly the nature of Jesus Christ, my life will begin to make sense in mirroring the model of serving and helping others.

This is a personal Bible verse that has been a strong connection to how I have grown as an investor. I equate finding life as a Christian through Jesus to finding a path to unlocking how I manage investments. Just as accepting Christ breaks the bondage of sin and removes the burden of doubt, coming to the realization of discipline through investment management strategies breaks the dependence and influence from Wallstreet. In either case, freedom and truly living life are the results.

Affirm Holdings, Inc. (AFRM) is up nearly 15 percent in after-hours trading post earnings results. To be expected, as growth stocks top Wallstreet expectations, they tend to ‘pop’ in this upcycle market. AFRM is doing a lot right with respect to revenue growth and cash flow inflection, two core metrics that are key drivers for investment returns. But there’s a problem.

I recently provided an update on PayPal Holdings, Inc. (PYPL) and the main concern for PYPL is that as the company continues to grow its payment volume, its take rate (the rate of net revenue as a percentage of gross payment volume) continues to decline. This has two impacts on financial performance, slowing revenue and decreasing margins, which is not good for investment returns.

As we turn to AFRM, the company is witnessing similar effects but is earlier in its growth phase and the market is not thinking about it right now. Investors need to track three attributes with AFRM:

1. Revenue as a percentage of GMV

2. Transaction costs as a percentage of GMV

3. Revenue less transaction costs as a percentage of GMV

All three of these metrics peaked during 2020/2021 and have since dropped by substantial basis points. AFRM has guided for long-term sustainable margin levels, but it remains to be seen as to whether this can be achieved. During FY 2025, stabilization has occurred, but other metric growth has slowed, like PYPL’s recent performance, again AFRM still being in a higher growth phase and business cycle.

AFRM by no means is getting extremely overvalued as its stock price to operating cash flow per share approaches 30 times. But investors need to understand that it is getting ahead of itself, especially as the company is highly dependent upon Amazon, Inc. (AMZN), and Shopify, Inc. (SHOP) e-commerce networks. The potential returns for AFRM are going to continue to diminish as the stock price increases and as tomorrow’s price jumps north of $70 per share it places the risk/reward for longer term investors in a precarious position. It’s time for investors to start exercising some caution.

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