Apple BNPL - Affirm Increasingly Becoming an M&A Target

Romans Chapter 1 verse 16 states, "For I am not ashamed of the Gospel, because it is the power of God that brings salvation to everyone who believes: first to the Jew, then to the Gentiles."

As a Christian, it's important for me to always support the Gospel, or good news, that is the life, death, and resurrection of Jesus Christ. It's also important for me to always recognize that God is the creator of everyone, and regardless of my beliefs, I always need to be polite and respectful within this context. Regardless, it is important to always be bold and to have courage as core attributes to count shame and fear.

I see the same important attributes being beneficial when it comes to investing. Being bold and having courage is not easy, especially when naysayers have stronger platforms and resources to pressure investors into paper-hands as a key tactic. But standing firm and keeping my eye on the prize and "running the race" are the best combatant against pressure.

What's been written of late on Apple, Inc. (AAPL) getting into the Buy Now - Pay Later, BNPL, market has become a hot topic. And to no surprise, Affirm Holdings (AFRM) has been a major casualty, with the stock dropping as low as 17% after Apple's announcement on July 13th.

Many analysts have weighed in, and as expected, held varying opinions in lock-step defense of their Price Targets, PTs. In short, those with buy targets have downplayed the competitive threat and suggested that the Stock Price, SP drop was a buying opportunity, while others with more dour prospects have claimed that survey checks have indicated over 50% of Apple Pay customers being willing to use an Apple BNPL service. The negative stance fits nicely to prior comments of not having enough transparency to value Affirm with Gross Merchandise Volume, GMV lacking clarity until 2024 or later, and yet placing a $55 PT.

For a company like Apple, with over one billion devices around the globe, the thesis for any competitive service is simply, there are over one billion potential customers/users. This all sounds nice, but if the world ends up doing everything through one platform, we all will loose. Competition is key, and the best way to ultimately determine the winners over time. Apple Pay will continue to be a part of the growing payment ecosystem, but for BNPL, I think there's merit in saying not so fast for this endeavor between Apple and The Goldman Sachs Group (GS).

Affirm is the BNPL leader with an estimated one-third of the BNPL market. Apple's immediate win here is iPhone sales through payment installments, but that's nothing new as no one would suspect that Affirm, or any other BNPL company would eventually get into that market. Aside from being the market leader, Affirm also has something else Apple doesn't, an exclusive agreement with Shopify, Inc. (SHOP), as well as a merchant agreement with Peloton Interactive (PTON), and multiple partnerships, notably with Walmart, Inc. (WMT), propelling the company's growth.

Apple does have a very strong ecosystem that is growing, with now $65 billion in sales derived from digital e-commerce. Ans sure the iPhone dominates against a company like Peloton with respect to sales, but average basket size is much higher for Peloton by a magnitude above four times, making a BNPL product more ideal, and Peloton is also poised for further growth. The real deal for me though is the Shopify exclusive agreement. Shopify is on track towards $200 billion in GMV and $80 billion in Gross Payment Volume, GPV, as the company continues to see its Shop Pay service penetrate further into GMV. The exclusive agreement with Affirm lasts through mid-2023 with automatic renewal unless terminated, and if successful for both parties, likely will see another three-year exclusive agreement renewal.

But more intriguing than the sustainability of the business relationship between Affirm and Shopify is the competitive angle. A company like Apple looking to develop its own BNPL product is going to get the attention of many companies including PayPal Holdings (PYPL) and Shopify, as well as other legacy financial institutions. I see this as a major positive catalyst towards increasing interest in M&A with Affirm becoming a top target.

In fact, while purely speculative, I wouldn't be surprised to see Shopify make a move to acquire Affirm, especially as the current exclusive deal is illuminating synergies and resulting performance benefits. The recent all-stock deal that Zoom Video (ZM) has announced for Five9, Inc. (FIVN) is a model of something similar that Shopify could follow. Shopify is flush with Cash with a net $7 billion, and could maintain most if not all of this through an all-stock deal. I think a deal could be had around $90 per share or just below $22 billion, easily rewarding investors.

Synergies could be strong as I'm modeling Affirm to approach $3 billion in Revenue and $700 million in Operating Cash Flow, OCF over the mid-term. Based on the agreement with Shopify, merchants on Shopify's platform pay fees to Affirm for platform services, and Affirm's Revenue is recognized net of fees paid to Shopify. This would reflect increases of 22% and 20% respectively for Shopify's corresponding modeled forecasts of $13.4 billion for Revenue and $3.3 billion for OCF over the mid-term.

There of course could be other suitors as well, Walmart comes to mind as they have increasingly shown interest in partnering and investing in Fintech. I don't see a company like PayPal looking to acquire Affirm, as they are attempting to grow competitive BNPL services themselves, although adding the leading BNPL brand could work leveraging PayPal's network and platform. But for me, it all comes back to the exclusive agreement with Shopify and Shopify's long-term runway to grow both GMV and GPV. Apple's foray into the BNPL market in my opinion will put some pressure on Shopify to revisit their overall Shop Pay approach, including taking a more detailed look at how the current agreement with Affirm is shaping up. In my opinion, this strengthens the agreement between Affirm and Shopify regardless of whether an merger happens at some point.

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