The Bottom Line Upfront 🎯
Affirm Holdings is transforming consumer finance with its transparent Buy Now, Pay Later (BNPL) solutions. Founded by PayPal co-founder Max Levchin, Affirm has achieved impressive growth with $26.6B in GMV (up 32% YoY) and 18.7M active consumers. The company generates revenue through merchant fees and consumer interest, with a strategic shift toward interest-bearing loans (now 74% of GMV). While still unprofitable on a GAAP basis, Affirm has significantly reduced losses and projects operating profitability by Q4 FY2025. Key growth drivers include the Affirm Card, Amazon partnership, and international expansion, though regulatory scrutiny and merchant concentration remain concerns. For investors betting on the transformation of consumer finance, Affirm represents a compelling but still speculative opportunity.
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Layer 1: The Business Model 🏛️
Affirm is essentially the cool, tech-savvy cousin of the traditional credit card – minus all the sneaky fees and confusing fine print. Founded in 2012 by PayPal co-founder Max Levchin, Affirm lets consumers split purchases into installment payments, making that $1,000 couch feel a lot more affordable when broken into bite-sized payments.
How Affirm Makes Money 💸
Affirm has two main revenue streams:
Merchant fees: When you buy something using Affirm, the merchant pays Affirm a percentage of the transaction value. Think of it as the digital equivalent of the "swipe fee" merchants pay when you use a credit card. These fees are typically higher for 0% APR loans (where the merchant subsidizes the interest to drive sales).
Consumer interest: On interest-bearing loans, consumers pay interest directly to Affirm. Unlike traditional credit cards, Affirm never charges late fees, deferred interest, or hidden penalties – a refreshing approach in the financial world.
Affirm offers three main products:
Pay-in-4: Four biweekly 0% APR installments (15% of GMV in FY2024 ↘️ from 19% in FY2023)
0% APR monthly installments: Longer-term, interest-free loans (11% of GMV in FY2024 ↘️ from 13% in FY2023)
Interest-bearing monthly installments: Loans with interest (74% of GMV in FY2024 ↗️ from 68% in FY2023)
They've also launched the Affirm Card, which functions as a debit card that can be used to pay in full from a linked bank account or converted to installment payments after purchase. Think of it as a "decide later if you want to pay over time" card.
Key Success Metrics 📊
Affirm tracks several key metrics to measure its business health:
Gross Merchandise Volume (GMV): The total dollar amount of all transactions processed (hit $26.6B in FY2024 ↗️ 32% YoY)
Active consumers: Users who made at least one transaction in the past 12 months (18.7M in FY2024 ↗️ 14% YoY)
Transactions per active consumer: Average number of purchases per active user (4.9 in FY2024 ↗️ 26% YoY)
Active merchants: Businesses using Affirm's platform (303,000 in FY2024 ↗️ 19% YoY)
The Secret Sauce: Risk Assessment 🧪
What makes Affirm special is its proprietary risk assessment technology. While traditional lenders rely heavily on credit scores and mountains of paperwork, Affirm can make lending decisions in seconds using just five consumer inputs that get transformed into approximately 500 data points. Their machine learning models have been trained on data from about 215 million loans and continuously improve with each transaction.
It's like having a super-smart bouncer who can instantly tell if someone's going to be a responsible patron or cause trouble – except this bouncer is powered by AI and gets smarter every day.
Layer 2: Category Position 🏆
The BNPL Battlefield 🥊
Affirm competes in the increasingly crowded "Buy Now, Pay Later" (BNPL) space, which has exploded in popularity over the past few years. Think of BNPL as the new frontier in the centuries-old battle for your wallet.
The competition comes from multiple directions:
Traditional financial institutions: Banks like J.P. Morgan Chase, Citibank, and Capital One have their own BNPL offerings
Payment networks: Visa and Mastercard offer installment capabilities
BNPL specialists: Klarna, Afterpay (owned by Block/Square)
Merchant-built solutions: Retailers creating their own in-house payment plans
Affirm's Competitive Edge 🔪
Despite this crowded field, Affirm has carved out a strong position with several key differentiators:
Merchant integration versatility: Affirm's platform works with businesses of all sizes across diverse industries. From mom-and-pop shops to Amazon, Affirm's technology can scale up or down.
Transparency pledge: While many financial products hide fees in the fine print, Affirm has maintained a "no hidden fees" policy since day one. No late fees, no deferred interest, no sneaky surprises.
Superior risk assessment: Affirm's proprietary technology allows it to approve a wider range of consumers while maintaining responsible lending practices. This means more approved customers for merchants without reckless lending.
Market Position Trends 📈
Affirm's position in the market has been strengthening, as evidenced by:
Growing merchant base: 303,000 active merchants in FY2024 ↗️ 19% YoY
Increasing consumer engagement: Transactions per active consumer up to 4.9 ↗️ 26% YoY
Expanding Affirm Card adoption: Now representing 8% of transactions ↗️ from 2% in FY2023
However, there's a potential vulnerability in Affirm's reliance on its top partners. The top five merchants and platform partners represented 47% of total GMV in FY2024 ↗️ from 42% in FY2023. This concentration could be risky if any major partner decides to develop their own solution or switch to a competitor.
Layer 3: Show Me The Money! 📈
Revenue Breakdown 💵
Affirm's revenue has been growing impressively, reaching $2.32B in FY2024 ↗️ 46% YoY. Here's how that breaks down:
Merchant network revenue: $674.6M ↗️ 33% YoY (fees paid by merchants)
Card network revenue: $151.4M ↗️ 27% YoY (interchange fees from card transactions)
Interest income: $1.2B ↗️ 76% YoY (interest paid by consumers)
Gain on sales of loans: $197.2M ↗️ 5% YoY (profit from selling loans to third parties)
Servicing income: $95.5M ↗️ 9% YoY (fees for servicing loans sold to others)
The most dramatic growth has been in interest income, which jumped 76% year-over-year. This reflects both Affirm's shift toward interest-bearing loans (now 74% of GMV, up from 68%) and its pricing initiatives, including increasing maximum APRs and converting some previously non-interest bearing loans to merchant-subsidized low APR loans.
Customer Patterns and Demographics 👥
Affirm's platform appeals to a broad cross-section of consumers across the credit spectrum. The company doesn't explicitly break out demographics, but we can see some clear patterns in consumer behavior:
Increasing repeat usage: 92% of transactions in FY2024 came from repeat consumers ↗️ from 88% in FY2023
Higher engagement: The average consumer made 4.9 transactions in FY2024 ↗️ 26% YoY
Declining average order value: AOV was $292 in FY2024 ↘️ from $318 in FY2023, reflecting Affirm's push into everyday spending categories beyond big-ticket items
Growth Drivers and Headwinds 🌪️
Growth Drivers:
Affirm Card expansion: Still early days but growing rapidly (8% of transactions in FY2024)
Amazon partnership: Representing 21% of GMV and continuing to grow
International expansion: Planning UK launch by end of FY2025
Shift to interest-bearing loans: Driving higher revenue per transaction
Merchant diversification: Growth across travel, ticketing, electronics, and general merchandise
Headwinds:
Regulatory scrutiny: The CFPB issued an interpretive rule in May 2024 extending certain dispute requirements to BNPL providers
Macroeconomic uncertainty: Inflation and interest rate environment affecting consumer spending
Intensifying competition: More players entering the BNPL space
Merchant concentration risk: Increasing reliance on top partners
Seasonality Factors 🎄
Affirm experiences predictable seasonal patterns:
Strongest GMV: Fiscal Q2 (holiday shopping season)
Lowest delinquency rates: Fiscal Q3 and Q4 (when consumers receive tax refunds)
This seasonality means that adverse events during the holiday season could have an outsized impact on annual results.
Layer 4: Cash Rules Everything Around Me 💰
Profitability Journey 🧭
Let's address the elephant in the room: Affirm is still losing money. The company reported a net loss of $517.8M in FY2024. But before you run for the hills, that's actually a significant improvement from the $985.3M loss in FY2023 ↗️ 47% reduction in net loss.
Affirm has been profitable on a non-GAAP adjusted operating income basis since Q4 FY2023 and expects to achieve GAAP operating income profitability by Q4 FY2025. It's like they've been climbing a mountain and can finally see the summit – they're not there yet, but the path is clearer.
Margin Trends and Cost Structure 📉
Affirm's operating expenses totaled $2.94B in FY2024, up 5% YoY. However, several expense categories showed improvement:
Technology and data analytics: $501.9M ↘️ 19% YoY
Sales and marketing: $576.4M ↘️ 10% YoY
General and administrative: $525.3M ↘️ 10% YoY
These reductions reflect Affirm's cost management initiatives, including a workforce reduction in February 2023 and improved operational efficiency.
However, some cost categories increased significantly:
Funding costs: $344.3M ↗️ 88% YoY (due to higher interest rates and increased funding debt)
Provision for credit losses: $460.6M ↗️ 39% YoY (due to growth in loans held for investment)
Processing and servicing: $343.2M ↗️ 33% YoY (due to increased payment volume)
Capital Position and Funding Strategy 💼
Affirm maintains a capital-efficient funding model with diverse sources:
Cash and investments: $2.1B as of June 30, 2024
Available funding debt capacity: $3.8B
Revolving credit facility: $330M available
The company's funding strategy includes:
Warehouse credit facilities: Short-term funding for loan originations
Securitization trusts: Packaging loans into securities sold to investors
Forward flow arrangements: Agreements to sell loans to third-party buyers
Convertible notes: $1.3B in 0% convertible senior notes due 2026
This diversified approach gives Affirm flexibility to optimize its capital structure as it grows. The company has been actively repurchasing its convertible notes when they trade below par, repurchasing $76.7M in principal during FY2024 for $63.6M in cash (a $12.6M gain).
Loan Performance and Credit Quality 📊
Affirm's allowance for credit losses as a percentage of loans held for investment increased to 5.5% as of June 30, 2024 ↗️ from 4.6% as of June 30, 2023. This increase reflects:
Growth in loans held on the balance sheet
Adjustments in credit criteria to support higher interest income
Changes in loan mix
The 30-day delinquency rates for monthly installment loans remained comparable year-over-year, suggesting stable credit performance despite the changing economic environment.
Layer 5: What Do We Have to Believe? 📚
The Bull Case 🐂
To believe in Affirm's long-term success, you need to believe:
Network effects will accelerate growth: As more merchants join, more consumers will use Affirm, attracting even more merchants in a virtuous cycle. The increasing transactions per consumer (4.9 ↗️ 26% YoY) suggests this is working.
Affirm Card will drive everyday usage: The card represents Affirm's path to becoming part of consumers' daily spending habits rather than just occasional big purchases. Early adoption (8% of transactions ↗️ from 2%) is promising.
Superior technology creates sustainable advantage: Affirm's risk assessment technology allows it to approve more consumers responsibly, creating value for both merchants and consumers that competitors can't easily replicate.
Path to profitability is real: The significant reduction in net loss and management's projection of GAAP operating income profitability by Q4 FY2025 suggest Affirm can eventually become sustainably profitable.
International expansion will unlock new growth: The planned UK launch and potential for further international expansion represent substantial untapped markets.
The Bear Case 🐻
The skeptical view on Affirm includes:
Regulatory risks could derail growth: Increasing scrutiny from the CFPB and other regulators could impose costly compliance requirements or restrict certain business practices.
Merchant concentration creates vulnerability: With 47% of GMV coming from the top five partners and 21% from Amazon alone, losing any major partner would be devastating.
Competition will erode margins: As more players enter the BNPL space, merchant fees could face downward pressure, hurting profitability.
Credit quality could deteriorate: In an economic downturn, Affirm's loan performance could worsen significantly, especially as they've shifted toward interest-bearing loans.
Path to profitability may take longer than expected: Despite progress, Affirm has been operating for over a decade without achieving GAAP profitability.
Key Metrics to Watch 👀
Transactions per active consumer: The most important indicator of network effects and consumer stickiness
Affirm Card adoption: Critical for the everyday spending strategy
Credit performance metrics: Delinquency rates and allowance for credit losses
Operating expenses as a percentage of revenue: Key to the path to profitability
Merchant concentration: Any reduction in dependence on top partners would reduce risk
Final Assessment 🧠
Affirm has built an impressive platform that's growing rapidly and making significant progress toward profitability. The company's technology-first approach, transparent consumer offering, and strategic partnerships give it strong competitive advantages in the BNPL space.
However, investors should be mindful of the regulatory risks, merchant concentration, and competitive pressures that could challenge Affirm's growth trajectory. The shift toward interest-bearing loans is driving revenue growth but also potentially increasing credit risk.
For those who believe in the long-term transformation of consumer finance away from traditional credit cards toward more transparent, flexible payment options, Affirm represents a compelling, albeit still speculative, investment opportunity. The company's improving financial performance suggests it's moving in the right direction, but it's not yet a sure thing.
As Max Levchin might say, Affirm is still writing its financial story – the plot is exciting, but we don't know the ending yet.
Disclaimer: This guide is for informational purposes only and does not constitute financial advice, investment recommendations, or an offer or solicitation to buy or sell any securities. The information contained in this report has been obtained from sources believed to be reliable, but StrataFinance does not guarantee its accuracy, completeness, or timeliness.