Square Deal for Afterpay and Ramifications for Affirm

Psalm Chapter 119 verse 14 states, "I rejoice in following your statutes as one rejoices in great riches."

Sometimes it's hard to think about rejoicing when following statutes or rules/laws and even harder to think about rejoicing in a parallel way in great riches. But for me, I recognize this verse to illustrate that if I know the Lord's statutes, but more importantly, what is behind them, then I will truly rejoice in a way that is as good as it gets. God loves me and everyone else in the world, so His statutes are always meant for our well-being.

I find this insightful for investing as sometimes, it may seem uneventful, unexciting, or just plain boring holding stocks, or managing a portfolio. But the seemingly boring/mundane aspects during times can quickly be transferred to a renewed excitement and focus based on the longer term objectives and corresponding opportunities. There's a reason why putting the work, following the path, and keeping to the daily grind yields returns.

While I was lasered in on Affirm Holdings (AFRM) being a potential acquisition target, stemming from Apple, Inc.'s (AAPL) announced entry into the Buy-Now-Pay-Later, BNPL market, Afterpay Ltd. (AFTPY) took the thunder being acquired by Square, Inc. (SQ).

It all started from Apple's BNPL announcement in mid-July with some headlines claiming that it was a direct target/threat to Affirm - Wall Street Journal, WSJ anyone. The key takeaways from the announcement were that Apple would be partnering with The Goldman Sachs Group (GS) using the latter company as the lender for installment loans - the brand being Apple Pay Later.

At the beginning of August, Square announced its decision to acquire Afterpay - the bombshell that had me scratching my head as to whether I was thinking things through correctly. Then, soon after Square's announcement, Affirm comes forth that it is working with Apple on a partnership to provide BNPL services for devices sold in Canada.

One thing is clear, Wallstreet has been highly negative on Affirm since the downturn in February earlier in the year, and through the mid-May bottom for aggressive growth plays. Seeing the recent events that have occurred, and it's very clear that those in-the-know were seeing these announcement potentially forthcoming down the road - this is Wallstreet's only advantage.

Some analysts were critical of Affirm being more of a credit card modeled BNPL, because of running a credit check, versus Afterpay's artificial intelligence, AI approach allowing customers to develop their ability to BNPL through increasingly larger amounts. This is interesting as Affirm also has its own AI approach, improving the sole credit check approach continued to be used by legacy companies, quite well. In other words, the arguments for Afterpay and against Affirm from a business model were weak.

The competitive angle also was used as a slight to Affirm with the new combined company through Square's network would be much more formidable. This always cuts both ways as there remains integration risks and Square's acquisition history is nothing to take a high level of confidence in. Don't get me wrong, I hold Square in my portfolio as well and I am positive and interested in how this deal will unfold. But it is no where close to a game-over stance against Affirm.

But now back to the point of what now, Affirm remains in an enviable position if you ask me. Affirm has partnerships with Walmart, Inc. (WMT), Peloton Interactive (PTON), as well as an exclusive agreement with Shopify, Inc. (SHOP). Adding Apple to the mix is strong as Affirm continues to scale up its customers, both consumers and merchants through its platform.

I've already estimated that the Apple partnerships alone, assuming it is exclusive in Canada, could potentially lead to $4 billion in Gross Merchandise Volume, GMV, over the mid-term. The best part of the announced deal is the irony for the WSJ as it's catchy headline was calling the Apple BNPL pivot a clear issue for Affirm. The key question here is could Apple still rely upon Affirm for the U.S. side as well - this is a possibility.

The main theme that is still in play is Affirm being and acquisition target. I recognize that analysts continue to be negative on the valuation of Affirm per the Afterpay deal, as well as on the characteristics of the business model not being as strategic of a fit. I disagree and would not be shocked to see Shopify, Apple, or a credit card company or bank look to make a move with Affirm. The recent precedent of all-stock deals would be appealing to a company like Shopify.

I did end up trimming the position I have in Affirm today after some thinking. This was driven by my confirmation to no longer keep Affirm as a top ten holding in the portfolio. While I remain highly positive on the company, I do believe that Affirms' business model will require sustained mid- and long-term agreements, with exclusivity being key, or will need to be acquired to be bundled into a company that has synergistic operations. For that point alone, I liquidated 57% of the position, and have retained the remainder.

In the event that Affirm sees any significant weakness in the coming months, I may consider increasing the position modestly. But I no longer feel that it merits being a top ten holding. The only Fintech that is in the top ten currently is Coinbase Global (COIN).

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