What Investors See in Affirm, the First Big Tech IPO of 2021
What you need to know about the buy-now-pay-later startup founded by PayPal veteran Max Levchin that went public today
Welcome to The Ticker, a series that examines everything you need to know about companies going public.
Today, Affirm will discover the value of patience.
Originally slated to go public in late 2020, Affirm, the financial services company created by PayPal co-founder Max Levchin that lets customers “buy now, pay later,” pushed its IPO to the new year. That decision was said to have been heavily influenced by the scorching debuts enjoyed by DoorDash and Airbnb, which saw both companies end their first day of trading markedly above projected prices. Although neither of those firms is complaining about how their IPOs performed, Affirm’s leadership seems to have taken the position that given the market’s enthusiasm, going public at their original price would amount to leaving money on the table. The company recently revised its price range in an updated SEC filing (from $33–$38 to $41–$44), and was reported late yesterday to have raised that to $49 a share, which would value the company at close to $12 billion. With its debut on the Nasdaq today under the ticker AFRM, here are three reasons Affirm is poised to succeed and one reason it might struggle.
A simple consumer experience
At its core, Affirm provides a straightforward, consumer-friendly value proposition. Rather than paying for an item’s full cost at the point of sale, customers can use Affirm to split their purchase into installments. In some cases, such installments are offered free of interest, meaning that consumers bear no added cost for leveraging Affirm’s service. This is the case with Affirm’s much-publicized agreement with Peloton, a deal that accounts for 20% of Affirm’s revenue.
In such instances, using Affirm is a no-brainer for consumers. Why pay the full-price upfront when you could amortize it over time? (One counterargument: You lose out on credit card points.) Even in cases in which Affirm does charge interest, ranging between 0%–30% APR, rates are often favorable compared with traditional short-term loans. Affirm is also significantly more accessible and flexible, allowing customers to sign up in a matter of minutes and allowing loans to be paid off early should the user wish to do so.
Affirm makes money whether or not it charges the consumer interest. In cases where a 0% APR “loan” is proffered, Affirm collects a percentage of the transaction (usually 3%–5%) from merchants like Peloton. Merchants are happy to pay this percentage because Affirm makes up for the cost by making it easier for more customers to purchase big-ticket items. However, when Affirm does charge interest, merchants pay a much lower percentage of the transaction (close to 0%) with Affirm monetizing through interest. Either way, Affirm provides clear value to both merchants and consumers.
A growing market
The attractiveness and ease-of-use of Affirm’s product seem to bolster arguments that the company’s total addressable market is, effectively, the $25 trillion spent on global retail. Affirm is so simple to use, couldn’t it be applied to any purchase?
But as it stands, “buy now, pay later” (BNPL) firms are far from genuinely threatening traditional payment methods, with total processing in the tens of billions. Affirm and its cohort have found strong adoption in e-commerce, particularly in a few categories, such as apparel, beauty, furniture, and electronics. These segments account for over $500 billion in retail sales in the U.S., with roughly 85% of spending in the space conducted offline. Bullish investors will point out that this gives Affirm ample room for the company to run, aided by tailwinds pushing online shopping forward.
Regionally, BNPL is expected to grow most rapidly in North America (233%), followed by Asia Pacific (133.3%), according to the 2020 Worldpay Global Payments Report. Based on those figures, BNPL should make up 3% of e-commerce spending by 2023 in the U.S. and 0.7% in Asia Pacific.
The size of the opportunity and growth rate in the U.S. is a reason for Affirm to be optimistic. While many of its competitors come from overseas and have focused on alternative markets, Affirm is firmly a U.S.-centric business. That may prove to be especially valuable as the battle for the checkout escalates.
It would be hard to find a better-suited steward of Affirm than CEO Max Levchin. Often hailed as something of a technical wunderkind, Levchin co-founded financial behemoth PayPal at the age of 23. During his stint at the company, Levchin spent a great deal of time focused on fraud detection, underwriting, and online consumer behavior — all critical components of Affirm.
After PayPal sold to eBay for $1.5 billion, Levchin founded a social media company, Slide, which subsequently sold to Google for $182 million. After his second significant win, Levchin founded a startup studio called HVF in 2011, out of which he spun out Affirm the following year, and he has remained CEO since. All of which is to say that Levchin represents one of tech’s most prolific, proven leaders with deep financial services experience.
Beyond Levchin, Affirm has assembled an impressive group of fintech veterans, drawing top talent from LendingClub, Square, and Levchin’s own stomping grounds of Slide and PayPal. Notably, chief capital officer Geoff Kott joined Affirm from Cross River Bank, the company’s banking partner.
Ultimately, Affirm appears to be a well-run, well-staffed organization equipped to thrive in the public markets.
The competence of management may prove particularly important given the competitiveness of Affirm’s space.
Competitors Afterpay, Klarna, Quadpay, and Sezzle are all vying for a bigger slice of the BNPL pie. The first of those, Afterpay, is already publicly traded, though it is not the largest player. That honor belongs to Klarna, whose company boasts 235,000 merchants within its network and significantly more app downloads (about 24 million) over the past two years than Affirm (about five million).
Data from Second Measure, which tracks consumer transactions, show that while Affirm lags the competition in the number of transactions per customer, it excels when looking at sales per customer and the average value of a transaction. Compared to Afterpay, for example — which has focused on beauty and apparel — Affirm is used for larger purchases, like a new camera, computer, or, indeed, a Peloton bike.
In short, Affirm is already taking on well-capitalized competitors and may run into more competition ahead. Large financial and e-commerce businesses are discovering there is no significant barrier to entry in the space. Giants like JPMorgan Chase, Amazon, Apple, and Levchin’s old home, PayPal, all offer financing options at the checkout. If others follow suit, Affirm may find that the sites with the highest payment volume are closed to partnerships, limiting the company’s opportunity.
Today’s IPO will reveal whether Affirm was right to wait — and will give investors a chance to decide whether they think Affirm will take off or be stifled by the competition.