The latest triumph for serial entrepreneur Max Levchins is the IPO of San Francisco-based installment lender, Affirm. Affirms stock opened Jan. 13 at $ 49 and saw a 98% pop to end the day with a market value of $ 23.6 billion, according to Forbes, valuing co-founder and CEO Levchins 11% Affirm to 2 , $ 7 billion.
Does Affirms value reflect the bulk of the rise in Affirm shares or is now a good time to buy? Despite Levchins’ incredible entrepreneurial record, I see three reasons for caution:
- Intense competition in the area of installment loans
- Post-pandemic growth slowdown
- Very high valuation
Affirms a wonderful IPO
Levchin, co-founder of PayPal, started Affirm in 2013 and has seen very rapid revenue growth. As CNBC reported, claims that revenue for the fiscal year ended June 30, 2020 jumped 93% to around $ 510 million and in the quarter ending September 30, revenue grew 98% while its net loss fell about half to $ 15.3 million.
Affirm takes a share of consumer purchases that it allows its merchant partners which include 6,500 retailers such as Peloton (30% of revenue), Wayfair
Affirm, which has more than 6.2 million users, offered 24.6 million shares for $ 49. It raised $ 1.2 billion in the process and left nearly $ 1.2 billion on the table after its shares rose 98%.
Max Levchins trip from Kiev to San Francisco
Levchin led a remarkable life. As I learned in a September 2012 interview, a few months after going public with Yelp, Levchin left Kiev in 1991 for the United States, staying with an uncle in the Chicago area. He was hoping to attend what he believed to be the biggest tech school in the country MTI [he told me that he was thinking of what he now knows is MIT but at the time he got the order of the letters wrong].
As a result, he did not apply to MIT but was persuaded to apply to “a top notch school nearby,” the University of Illinois at Urbana-Champaign, where he earned his computer science degree. From there he went to Palo Alto where he spent “four years with a mattress lying on the floor in the crappy apartment” of close college friend Scott Banister.
While he told me that he had started “a lot of businesses [that] failed, “Confinity created software for an online payment service that eventually became eBay
After that, Levchin launched the social apps company Slide that Google
In the summer of 2004, two engineers, including former PayPal engineering vice president Jeremy Stoppelman, told Max that they wanted to build what is now Yelp. Max wrote them a check for $ 1 million “on the spot” on his 29th birthday.
Yelp’s stock hasn’t been a big investment. It went public in March 2012 at $ 24.58 and has since grown 28% to $ 31.40, a compound annual growth rate of 2.5%. During that same period, the S&P 500 has advanced much faster at an average annual rate of 12.8%.
Intense competition in installment loans
Affirm competes in the Buy Now, Pay Later (BNPL) industry, which is expected to grow rapidly. According to Crunchbase News, the pandemic has propelled demand from competitors such as Afterpay, Affirm, Klarna and PayPal. By 2025, the volume of transactions is expected to increase 10-15 times to between $ 650 and $ 1 trillion.
This size and growth has attracted a significant amount of venture capital supporting many competitors. Crunchbase reported that 25 players have raised $ 1.7 billion since 2016 with Affirm getting the lion’s share ($ 1.5 billion).
Competition in the BNPL industry is based in part on how quickly a consumer can get a loan. Kamran Ansari, a venture capital partner at Greycroft, told Crunchbase that Affirm and Bread has created a newer version of real-time e-commerce digital payout programs while offering interest rates below those of credit cards. Later, Ansari said, rivals Afterpay and Sezzle introduced perks such as payment in four installments.
Of course, Affirm faces competition from more traditional rivals. According to his prospectus, these include legacy payment methods, such as credit and debit cards offered by card-issuing banks such as Synchrony, JP Morgan Chase, Citibank, Bank of America, Capital One
One positive aspect of the BNPL industry is that players benefit from two sources of income. First, the merchant pays the BNPL service provider 2% to 3% of the price of the purchased item. Then the consumer pays interest on the loan. Affirm and its competitors are replacing paper letters sent to borrowers with a transparent, much faster and more efficient digital approach. In addition, the merchant does most of the marketing to consumers.
There are many risks in this business model. All of these competitors could start to compete by reducing the fees they charge to merchants. Traders may decide that it is more cost effective to offer their own installment loan services.
Finally, more consumers will default on their installment loans if they lose their jobs. In June 2020, Affirms’ allowance for credit losses increased 40% to $ 82.6 million from the previous year. There is no doubt that such busy consumers would place a higher priority on buying food and shelter than paying off their Peloton loans.
Post-pandemic growth slowdown
The BNPL industry has experienced tremendous growth. However, will this growth rate remain high? Two Affirm merchant partners: Peloton and Wayfair look set to post slower revenue growth for the fourth quarter of 2020.
Peloton, up 567% since its IPO in September 2019, to a record level of $ 169.35 has grown very quickly but expects a significant slowdown. During its quarter at the end of September, Peloton recorded revenue growth of 232% of $ 758 million. However, he forecasts growth of 114% to $ 1 billion for the December 2020 quarter, according to his Transcript of the November earnings conference call.
Peloton expects much slower expansion in FY ’21. Its CFO, Jill Woodworth, said she expected modest quarterly sequential revenue growth.
Wayfair, whose stock is down 9% from its 52-week high of $ 349, saw third-quarter revenue growth of 67%, but in early November it reported a slowdown in the growth of about 50% year over year, depending on its third quarter earnings call transcript.
Compared to its rivals Afterpay and Klarna, Affirm seems overpriced.
It’s a little hard to say because these two are private companies. Ideally, I would like to compare companies on the basis of revenue growth and market valuation against revenue, profit and cash flow.
Based on the value of the business per user, Affirm looks very expensive. How? ‘Or’ What? Forbes reported that the five-year-old Afterpay is valued at $ 24 billion and has 13 million registered users, or $ 1,846 per user. 15-year-old Klarnas users are worth about half that amount at $ 972 ($ 10.7 billion valuation and 11 million US users).
Affirms ‘value per user was almost twice as high as Afterpays, a whopping $ 3,806, based on Affirms’ valuation of $ 23.6 billion at its close on Jan. 13 for $ 6.2 million. ‘users.
If Affirm can forecast even faster growth in its first quarterly report, I would expect its stock to rise. But its high valuation doesn’t leave much room for error.
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