Affirm: High Expectations Met And Exceeded

Sep. 10, 2021 8:16 AM ETAffirm Holdings, Inc. (AFRM)27 Comments


  • Affirm's top line smashed through its Q4 guidance.
  • Affirm's partnerships with Shopify and Amazon will pay dividends over time.
  • I estimate that Affirm is priced at 20x forward sales, which is an attractive valuation.
  • I do much more than just articles at Deep Value Returns: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Futuristic display with a Buy Now Pay Later concept written on it.
Duncan_Andison/iStock via Getty Images

Investment Thesis

Affirm (NASDAQ:AFRM) impressed investors with Q4 2021 results and put out solid guidance for fiscal 2022.

Not only did Affirm beat its own guidance by more than 2,000 basis points, but the year ahead is set to be a very strong one.

I estimate that even considering the large jump in diluted shares in 2022, the stock still trades for approximately 20x forward sales. Investors would do well to consider this investment. Here's why:

Revenue Growth Rates Jump

Three weeks ago I wrote an article about Affirm where I concluded with:

Given how many players are oozing to get into the Buy Now Pay Later space, I believe that from this valuation, investors are more likely to see the stock rise by 50% to $26 billion than we are to see Affirm fall much lower.

So what happened? And Why?

Source: author's calculations; management guidance

The biggest takeaway from the earnings is just how much Q4 2021 jumped relative to the high end of its previous guidance.

Remember, I argued two different aspects. Firstly that even if Affirm was to beat the 47% y/y high guidance, that investors would want to see firm evidence that in fiscal 2022 Affirm could grow by at least 40% CAGR.

Now, given that Q1 2022 is guided to be up a whopping 109% investors are left puzzled. Note above, the same period a year ago was Affirm's strongest quarter.

This means, if Affirm beat its Q4 2021 revenue growth rates guidance by 2,400 basis points, together with the fact that Q1 2021 was its strongest and toughest quarter to beat, this all together implies that management's 39% CAGR for fiscal 2022 is just so conservative that it should be fully disregarded altogether.

In essence, consider the following:

Source: SA Premium Tools

Affirm took analysts' guidance, and gave investors guidance that figure plus just a bit higher so that the share price wouldn't sell off on the back of its guidance, while at the same time leaving themselves plenty of room to positively surprise investors.


Now, before we go further, allow me to clarify an aspect when it comes to Affirm. When Affirm takes its revenue, it has costs associated with those revenues, such as accounting for credit losses, funding costs, and processing. So its net revenues are meaningfully lower than its gross revenues.

However, the core of the investment thesis behind Affirm is their leading technology allows them over time to decrease their provisions as they increase the amount of customer data they hold.


This is important to understand, so I'll repeat it. If were to assume that Affirm's business model works, you would need to see its revenue less transaction costs per gross merchandise volume increasing. And this is exactly what we are seeing in the graph above. During Q4 2020 we can see 6.3% whereas this time around it reached 7.0%.

Thus, we can see that its underlying business proposition is working. But there's more.

Digging Further into the Affirm's Prospects

The biggest next biggest validation that Affirm offered to its business model delivering value is illustrated below:


Consider that in the same period a year ago the number of active customers was up 77% y/y, while growing from a smaller base. Now, during Q4 2021, the growth in active customers was 2,000 basis points stronger, despite having to work off a larger base.

This insight is important because it shows that Affirm and other Buy Now Pay Later firms are still in the infancy of educating consumers to a new way to pay for products on credit, without the predatory fees, as exemplified by the nearly doubling of active customers during Q4 2021.

Positives and Negatives Considerations

We know that Affirm paid $65 million to have an exclusive partnership with Shopify (SHOP) by making Shop Pay Installments, exclusively powered by Affirm.

Also, we know that Affirm's has recently made a non-exclusive partnership with Amazon (AMZN) that's not included in its revenue guidance and it will be updated throughout the year.

These two partnerships are likely to ensure an impressive run-rate for Affirm. Particularly in the case of Amazon siding with Affirm. When many investors were troubled by Apple (AAPL) aggressively launching its own Buy Now Pay Later solution, investors were uncertain of Affirm's ability to rapidly take mind share with consumers. Consequently, this tie up pushes those troubles aside.

Now, let's discuss the negative aspect.


For Q4 2021, Affirm's adjusted operating income margin was steadily improving with Q4 2021 reaching a positive 5%. However, Affirm's guidance for fiscal 2022 is now looking to return to negative territory and is expected to come in at negative 11%.

However, I suspect that investors will be more than willing to disregard Affirm's bottom line, provided Affirm can show investors that the number of active customers continues to rapidly increase as well as its revenues growth rates staying strong too.

Valuation - Attractively Priced

Before we dig into its valuation, let's keep in mind that Affirm is guiding for approximately 290 million shares outstanding for fiscal 2022. At the time of writing the share price is $112, thus investors are being asked to pay a $32 billion market cap for Affirm.

As I've discussed throughout, we are welcome to use Affirm's guidance of $1.2 billion for the year ahead, but I suspect that this will be raised as the year unfolds.

Nevertheless, to start our valuation work, we can estimate that Affirm is priced at 27x forward sales. On the surface, as a value investor, I'm not going argue that this stock is cheap.

On the other hand, it's not exuberant either. Moreover, if we suspect that Affirm's Q1 2022 exit revenue growth rates continue high into Q2 2022, we are likely to see Affirm's revenues reaching closer to $1.6 billion for 2022. This would put its stock priced much closer to 20x forward sales, which makes the stock attractively priced.

The Bottom Line

Affirm turned a corner on its operations. If there was ever any doubt over its growth prospects, they are now in the rearview. Affirm put out a noteworthy quarter with reassuring guidance. This stock is absolutely worthwhile considering, even now, after the stock has soared more than 22% after-hours. Happy investing!

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in AFRM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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