Fintech, or financial technology, is a growing industry that got a huge push from the pandemic. Even with stores now mostly open again, shoppers are continuing to use digital payment options, and that’s great for the many fintech companies developing digital solutions for a better financial experience.
Affirm Holdings (NASDAQ:AFRM) is one such company. It provides “buy now, pay later” plans with no late fees for customers, as well as savings accounts. The company posted a mostly excellent third-quarter earnings report, but there was one crucial number in the report released last week that investors and potential investors need to pay attention to.
Affirm is too reliant on Peloton
Affirm’s revenue increased 67% year over year in the third quarter to $231 million, easily beating internal guidance of $1.85 million to $1.95 million. That included $3.5 million that was recorded as a reduction in anticipation of the estimated financial impact of Peloton Interactive‘s (NASDAQ:PTON) treadmill recall.
Peloton is Affirm’s biggest client by far, accounting for around 30% of total sales. One of the biggest risks with Affirm is this dependence on one client, and in its first quarter as a public company, it’s already feeling the consequences of that large connection.
The most significant number in Affirm’s third-quarter report was the increase in merchant partnerships, which is its best path forward. It doubled its active merchant count year over year to 12,000 in the first quarter. The company also said that its deal with Shopify (NYSE:SHOP) to offer Shop Pay installment plans to Shopify merchants resulted in 10,000 Shopify merchant signups in April and May. It expects that number to significantly increase as the option is rolled out to more merchants, which should lead to increased sales and provide a cushion against potential losses from Peloton.
Installment payments are taking off
Some other notable results from the third quarter included an 83% year-over-year increase in gross merchandise volume, or a 100% increase without Peloton factored in, which was greater than the 55% increase in Q2. There was a 60% increase in active customers year over year to 5.4 million, and transactions per customer also increased 10%, which is another key growth driver.
Operating loss more than doubled, mostly due to stock compensation from the IPO. Net loss tripled to $247.2 million, which included stock-based compensation charges plus charges related to the acquisition of PayBright.
Affirm went public at a challenging time in retail, which clearly had an effect on the company’s overall performance. It’s now seeing more movement in categories that were pressured during the pandemic, such as travel. Travel GMV increased 50% — less than the company’s overall growth, as it’s still somewhat pressured, but a great sign of improvement. Many consumer travel expenses are in Affirm’s sweet spot since hotel accommodations and plane tickets can be prohibitively expensive. As more people begin to travel, Affirm’s core market is relying on it to fund vacations that they may otherwise never be able to afford. That’s great news for Affirm.
Still lots of uncertainty
Affirm still has to take into account the potential impact of the Peloton recall in the fourth quarter, and it will also have charges related to the acquisition of Returnly, a company that makes online returns easy. But all of these acquisitions bode well for Affirm, which is competing with much larger companies, such as Klarna and Afterpay. Its best chance to stay competitive is to multiply its merchant count.
In the meantime, Affirm’s stock price has plummeted roughly 44% year-to-date and is still trading at a relatively high 20 times sales. As it continues to grow merchant count and sales, as well as improve its platform and offer more services, Affirm may become a solid investment, but for now, it is just a company to watch.
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