Delayed gratification describes an ability to postpone an immediate gain in favour of a potentially more valuable, longer-term reward. Online shopping during the age of the pandemic perhaps offers a case study of this with the rapid growth of e-commerce set against broader economic destruction and job losses. E-commerce sales in the USA grew by 44% in 2020 to $861 billion and now account for 21.3% of total retail sales.
Affirm (NASDAQ:AFRM) is a San Francisco-based buy-now, pay-later firm that recently went public and currently trades at a market capitalization of $22.20 billion. BNPL at its core is a financing instrument used to boost online spending by deferring the immediate cost of an item, then spreading it as periodic instalments over a specified time period. This is an inversion of delayed gratification as future spending and saving power are sacrificed for consumption today. This type of consumption is set to grow as e-commerce becomes ever more ubiquitous in the post-pandemic age. Affirm is set to benefit from this.
The stock price peaked at $140 and has since fallen 40% to $84.41 as of writing this article. This has been driven by a wider rotation of capital away from high growth and somewhat expensive companies to value plays that have been adversely impacted by the pandemic.
Affirm, in spite of the short-term gyration in the price of its common shares, has a business model set to ride the tailwinds of the growth of e-commerce. The company has created a financing mechanism for online vendors to boost sales from higher conversion rates.
Driving Increased Sales From Higher Conversion Rates
Affirm partners with online merchants to offer another way for their customers at checkout to pay. They make money from interest levied on these customers as well as fees charged to merchants. This is justified as the merchants benefit significantly from both higher-order sizes and conversion rates.
Affirm last reported earnings for its fiscal 2021 second quarter ending December 2020. The company realized revenue of $204 million, a year-over-year increase of 57%. This was driven by the Christmas shopping period with a gross merchandise volume of $2.1 billion, an increase of 55% from the comparable YoY period.
With revenue guided to be $185 million for the third quarter, Affirm should be able to see total revenue of at least $750 million for its 2021 fiscal year. However, the company might be able to beat this if its partnership with Shopify (NYSE:SHOP) is more comprehensively rolled out during the year. This exclusive partnership should see Affirm's BNPL solution rolled out to eligible merchants who are signed up to Shop Pay Installments by Shopify. To underscore the extent of this partnership, Shopify is an investor in Affirm with 20 million shares.
Using guidance for total revenue of $750 million at the end of the 2021 fiscal year, Affirm's current market cap would place the company's revenue multiple at 30x. While seemingly expensive, the market is forward-looking. Hence assuming a somewhat conservative revenue compound annual growth rate of 30% the five-year revenue multiple would fall to 8x. Affirm is more than likely going to outperform this on the back of numerous business developments.
Firstly, the company expects to launch its BNPL debit card later this year to benefit from the expected rise in spending on brick-and-mortar retailers as the US vaccination efforts peel away statewide stay-at-home orders and capacity constraints. The company also offers its BNPL solution to airlines and vacation firms. This should see significant demand as the global vaccination effort continues and stringent border controls and limitations on movement are removed.
Commerce In The Post-Covid Age
Global commerce in the post-covid age is set to continue its structural shift towards online retailers. When set against this backdrop Affirm's forward-looking valuation is likely to be maintained in the long term even as the stock market undergoes a short- to medium-term correction. The company's partnership with Peloton (PTON) and Shopify also offers quasi exposure to these fast-growing technology companies.
Affirm does face immense competition from a number of established BNPL companies and upstarts including Afterpay (OTCPK:AFTPF) of Australia and Sweden's Klarna (KLAR). The latter just raised $1 billion at a $31 billion valuation and on revenue of $1 billion in 2020. While the competition is fierce, exclusive partnerships like that with Shopify and product innovation should see Affirm maintain its foothold in the United States as the industry consolidates in the coming years.
With online retail still at 21.3% of total retail sales, its ramp will bring immense opportunity for long-term investors. It also implies that Affirm is still in the early stages of this journey as e-commerce sales from a global perspective are still at comparatively low rates of penetration.