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Affirm Holdings - The Latest of Wallstreet's Coverage Shenanigans

Matthew Chapter 16 verse 25 states, "For whoever wants to save their life will lose it, but whoever loses their life for me will find it."


Life is challenging, especially as I have faced trials over time. But for the me, the real challenge is living a life that honors God. Jesus Christ has challenged me to "pick up my cross". I find that my perception of what is "good" tends to be part of this challenge. For investing, there's so much information to process, that it can be frustrating to decipher, especially with social media discussion building off of and inflating false narratives. I see a similar challenge where I need to chose the right path towards investment success.


We've all seen the inability of Morgan Stanley's analyst, Adam Jonas to adequately cover Lordstown Motors (RIDE). This has ranged form questions from him suggesting a serious misunderstanding of Lordstown's technology, to completely removing coverage on the company.


Stephens is the latest firm to reduce its coverage details and Affirm Holdings (AFRM) is the victim with a dropping Stock Price, SP earlier in the week. Stephens analyst Vincent Caintic initiated coverage on Affirm with a $55 SP. The analyst commented that Affirm's valuation has gotten ahead of itself, and that it will need to grow its Gross Merchandise Volume, GMV much faster, despite general positive sentiment. The kicker, the analyst stated that he will not have visibility on whether Affirm will achieve the level of growth required until after 2024. Apparently, despite Affirm's tangible business (Revenue, B/S, Cash Burn, etc.) Mr. Caintic is not willing to take a position on the company today in a responsible manner.


We clearly are living in a world where misinformation drives the substantial amount of mainstream news (if not all of it). But now as investment transparency grows further, there is a concurrent increase in the growth of the sophisticated investor. It isn't help Wallstreet's image when nalysts are throwing in the towel where they simply feel they don't want any accountability.


In my opinion, this is a reaction to the paradigm shift afoot, and Wallstreet's undeniable inability in picking winners versus losers. As a company like Affirm looks to take business from traditional credit card companies, there are firms like Stephens not willing to publicly make statements that would send the wrong impression for other existing and/or potential clients.


Cathie Wood has made herself a huge success by letting go of Wallstreet's traditional business model (game of musical chairs), and has found herself making huge calls against the norm. I see this as a clear stance of where the future is headed for more entrenched and sophisticated investors looking for growth, as well as future winners. Wallstreet has over-complicated many aspects of investing to their benefit in the past, and many investors are no longer interested in these games.


Mr. Caintic is concerned about the company's GMV. GMV is indeed important as it will continue to be the core driver for Net Revenue, but more important from a valuation perspective will be Affirm's ability to derive Cash Flow. The recent strengthening partnership with Shopify, Inc. (SHOP) is paramount, and likely part of the desire by Stephens to not want to responsibly cover Affirm. Affirm is growing across many merchant verticals, and Shopify is one of the key areas driving this. At the same time, other major companies like Wal-Mart Stores (WMT) have hopped on board as well.


I don't think that Stephens feels that these agreements/partnerships, among many others, merit enough transparency and visibility in staking a claim for the mid-term. That's fine, but not providing the details for their position is simply tacky and tasteless. Anyone can take a mathematical approach to determine and forecast Affirm's GMV and Net Revenue. The increase in Affirm's Cash Burn may also be playing a role as modeling Cash Flow, I must admit is very challenging at the moment.


Regardless, for me looking out mid-term, I am modeling Affirm to generate $24 billion in GMV, leading to Net Revenue of just below $2.8 billion. More importantly, I'm assuming a 25% OCF margin at just below $700 million. So the questions become, why so optimistic for strong Cash Flow inflection, and what is a reasonable valuation? The fact that Stephens has assigned a low-ball price target with no indication of mid-term details is a major red flag.


For Cash Flow performance, I continue to see improvement in an already very strong Gross Margin that is now above 91%. The challenge is a lot of Affirm's Operating Expenses are growing at rates in-line or higher than Net Revenue growth leading to a substantial increase in Profit Loss. This increase has negatively impacted Cash Flow for Adjusted Reconciliation, while Working Capital has also worsened.


But I do see potential for things to change. As Affirm continues to scale, adjusted reconciliations will see improvement towards positive Cash Flow. At the same time, the core driver for Working Capital to be negative (Operating Lease Right-of-Use Assets and Prepaid Payroll Taxes for Stock-Based Compensation, SBC) will have potentially inverse impacts. Operating Lease Right-of-use Assets should see a more modest increase moving forward, while SBC impacts will need to be further scrutinized.


The other highly important element at play here is Fintech. There are many new companies that need to be thought of from a valuation perspective including Coinbase Global (COIN), Marqeta, Inc. (MQ), SoFi Technologies (SOFI), among others. The broad spectrum of Finance Sector valuations run as low as 2-4 times EV/Sales and 4-10 times OCF per share multiples for many banking and credit card companies (the legacy players). However, the top end of this spectrum sees companies like Mastercard Inc. (MA) and Visa, Inc. (V) sporting EV/Sales north of 20 times and OCF per share near 50 times.


Where do newer Fintech company valuations fit? Based on the potential, it is my opinion that Coinbase will be one of the most dominant mid-term performers, and as such, will justify valuation multiples similar, or even higher possibly, to Mastercard and Visa. Companies like Affirm and Marqueta, if successful over the mid-term, will likely sport valuation multiples slightly lower from an EV/Sales perspective, but similarly for OCF per share multiples as they grow further into their valuation.


The key thing for investors to understand is that similar to the developments of the technology stack, there is a growing financial stack that is Fintech. Many new entrants are targeting a model similar to Mastercard and Visa, and will correspondingly command premium multiples as they continue to successfully scale and grow. Over the mid-term, if Affirm is able to grow to levels at or exceeding my financial model, I am comfortable assigning the company an EV/Sales and OCF per share multiple at 18 and 75 times. Many of these Fintech companies will continue to see sustained robust Revenue growth as they are becoming more and more embedded within the fastest growing newer merchant models.


The final point is competition. Recently, I've come across some very disgruntled investors regarding Paysafe, Ltd. (PSFE). Not all Fintech will be created equal, and Revenue growth will be paramount. A company like Paysafe has a very strong Cash Flow margin, but is at a critical point to reaccelerate growth, and I'm of the opinion, that growth-by-acquisition will be key. SoFi, mentioned above, has also strategically entered into the payment processing side of the business through acquisition. Both Paysafe and SoFi are seeing slower growth than peers like Affirma and Marqeta. Paysafe has a more realistic guidance expectation over the next two years than SoFi, and top-line growth with strong Cash Flow inflection potential is the model that will win out in my book.



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