The Evolution Of Affirm: Can It Go Mainstream?

Core Insights - Affirm reported strong earnings, leading to a 30% increase in stock price, highlighting the effectiveness of its business model and user profile [2] - The misconception that Affirm primarily serves financially insecure consumers is debunked, as data shows that middle-income consumers are more likely to carry credit card debt [3][4] - Affirm's partnerships with major platforms like Shopify have attracted higher-income users, indicating a shift in its customer base towards mainstream credit card users [11][12] User Profile and Credit Card Debt - Credit card liabilities account for 6% of total household debt in the U.S., with outstanding balances reaching $1.14 trillion as of Q1 2024 [4] - Middle-income consumers, rather than low-income consumers, predominantly carry credit card debt, with 40-60% of them affected [4][6] - The belief that consumers with credit card debt cannot repay it is challenged by data showing that debt balances typically account for 40-60% of income, suggesting temporary debt for larger purchases [6][8] Affirm's Growth and Performance - Affirm's Gross Merchandise Volume (GMV) has shown growth in newer cohorts post-FY2020, contrasting with stagnant spending from earlier users [9][11] - The company has outperformed large banks in terms of credit card delinquency rates, particularly in the 60- and 90-day categories, indicating superior risk management [13] - Affirm's return on equity (ROE) stands at 51%, significantly higher than Bank of America's 12%, suggesting a more profitable model if operating efficiency is maintained [16] Financial Metrics and Operational Efficiency - Affirm's operating expenses have decreased, with technology, sales, and marketing costs down by 19%, 10%, and 10% respectively compared to 2023, while revenues grew by 46% [19][22] - The company is expected to achieve GAAP profitability by the end of FY2025, supported by partnerships with major payment platforms [22][23] - Affirm's transaction margin and revenue per employee are competitive, with a market capitalization under $10 billion, indicating potential for premium valuation if margins improve [29][31] Competitive Landscape - Affirm's transaction margins and take rates are among the highest in the BNPL sector, positioning it favorably against competitors like PayPal and Klarna [26][27] - The company is expected to capture a larger share of the credit card market, particularly among consumers with credit card interest debt, as it moves towards mainstream acceptance [23][31] - Affirm's distinctive business strategy and capital efficiency may pose a threat to established competitors in the financial services industry [32]