Is Affirm IPO A Buy?

Affirm (NASDAQ:AFRM) is one of the most innovative financial technology companies to rise from the 2010s. The company found a niche offering short-term financing at the point-of-sale for ecommerce.

Founded in 2012, the company quickly grew through partnerships with everyone from retailers like Walmart (WMT) and Overstock (OSTK) to e-commerce platforms like Shopify (SHOP).

Now it’s the first unicorn IPO of 2021 and has a chance to further disrupt an already struggling legacy financial industry.

But is Affirm IPO a Buy?

The top brass walked away from a nearly $10 billion valuation after DoorDash (DASH), Snowflake (SNOW), and Airbnb’s bloated prices dominated headlines. It doesn’t want to be seen as a tech play that’s part of the same IPO mania and creates a bubble.

That’s not what it is – this is a tool that connects unbanked and underbanked individuals with purchasing tools and options. It could disrupt the in-store credit card game, doing to Visa Inc (NYSE:V) what PayPal Holdings (NASDAQ:PYPL) did to Wells Fargo (NYSE:WFC).

Affirm’s growth in 2020 was really fueled by one company though – Peloton Interactive (NASDAQ:PTON).

To see if its initial public offering can affirm its position as part of America’s too-big-to-fail financial infrastructure, we run the company’s credit below.

Affirm Business Model Earns Big Bucks

Affirm partners with stores to let consumers defer the initial up-front costs of a purchase through an installment loan. You can borrow anywhere from $100-$10,000 for up to 18 months to help pay for that new TV, sofa, etc.

While you can use it to buy tech, it’s more of a financial technology play than a pure technology stock.

Financing starts at zero percent (with limitations), but the annual percentage rate (APR) ends up being between 10 and 30 percent.

Unlike a credit card, this is not a revolving line of credit, so it will affect your credit score like any other installment loan.

The company raised over $620 million in venture capital and $100 million in venture debt to grow its transaction volume over $1 billion per year by 2020. And as people sought ways to buy now and pay later during stalled stimulus talks, Affirm’s revenue growth accelerated.

With unemployment worsening and businesses remaining closed, Affirm’s business model provides liquidity to the 5 percent of unbanked and 16 percent of underbanked Americans reported by the FDIC and Federal Reserve.

Fintech companies like PayPal (PYPL) and Square (SQ) grew their businesses during the pandemic while traditional finance companies like Wells Fargo (WFC) and Visa (V) struggled to recover to former trading levels.

This opens a door for speculation on its IPO price.

When Is The Affirm IPO?

Affirm initially aimed at a November 2020 public offering but instead delayed it until 2021. The company’s management wanted to avoid the volatility that plagued the 2020 IPO market.

The pandemic stock market was as volatile as a cryptocurrency, and seasoned investors felt the pinch at times too.

Price volatility was commonplace. Even its partner Shopify (SHOP) gained 2x-3x returns to investors, depending on when you jumped in the market.

It also rides a fine line in its business model, which falls in the middle of a volcano of hotspots. Consumer financing has a lot of regulations, and it took time to get its approval from the Securities and Exchanges Commission to be listed on Nasdaq.

Still, it’s a young company with plenty of growth potential, so long as its risk management can account for those defaulting on new Peloton bike purchases.

Affirm Vs Klarna

Affirm is far from the only company offering consumers and businesses point-of-sale loans. PayPal is in the game through PayPal Credit. LendingUSA, FinanceIT, and Lending Point Merchant Solutions (formerly LoanHero) all have skin in the game.

So does Klarna, an Affirm rival valued at approximately $11 billion.

It’s a highly competitive financial market, and both companies are keeping an eye on each other. Klarna is Affirm’s Swedish counterpart backed by Snoop Dogg that raised over $650 million from investors. It offers the same “buy now, pay later” service and has agreements with 200,000 sellers, processing 1 million transactions each day.

Klarna has over 14 million users around the world, with 2 million in the U.S. and generated $742 million in net operating income in 2020. That’s a 37 percent increase from the prior year’s period, and Visa is among its investors.

Etsy (ETSY), Macy’s (M), H&M, Alibaba (BABA), Nike (NKE), Samsung, Ikea, Expedia (EXPE), and more have Klarna agreements, so it has major clientele. One client neither Affirm nor Klarna service, however, is Amazon (AMZN), which handles financing through Synchrony Bank.

So, is Affirm’s stock a buy during its IPO?

Is Affirm IPO A Buy?

Although still relatively new, the company has chops. Its top line for the fiscal year of 2020 was $509.5 million, a 93 percent increase from the prior year. In the most recent quarter, it generated $174 million, showing rapid expansion from the pandemic e-commerce tailwind.

It also earned a $34.8 million profit in the summer following the beginning of the shutdowns, though took a slight loss in the proceeding quarter. The biggest problem it may face is buyers defaulting on credit, which is a substantial risk.

Affirm needs to focus on its partnerships with big stores over single products. While the Peloton (PTON) buzz is nice, it could find itself tied to other pandemic stocks and weighed down in the near term.

This all assumes the company chooses to go public at all, which it may choose not to do until the market is more favorable.

What Is The Affirm Ticker Symbol?

Affirm chose the stock symbol AFRM when it does finally go public. As of January, it’s still an open question until the end of the month.

If it launches its IPO, it will likely happen within the first quarter of 2021.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.