💳 Can Affirm Withstand The Regulatory Whiplash?

Walgreens, CVS impose home test purchase limits.


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💳 Affirm: Regulatory Whiplash?

There have been two dominant trends in 2021. One was SPACs. The other was Buy Now, Pay Later (BNPL) going mainstream. Affirm Inc. (AFRM), the BNPL pioneer, was the first traditional IPO of 2021. As the year draws to a close, its shares are at the same level as they ended after the first day of trading. Why? (Tweet This)

A Crowded Market

When Affirm went public in January this year, investors went ga-ga over the concept, ignoring the obvious risk factors associated with the company. One of the most glaring ones was its association with embattled fitness equipment manufacturer Peloton, which contributed to one-third of its overall revenue. The company closed day one as a public company with a market value of $23B.

In June, the company expanded its partnership with Shopify to include all eligible US merchants selling on the platform. This move bumped Affirm into the big league as its overall merchant count jumped from 6.5K in Q1 2020 to over 100K in Q1 2022.

The company hit the jackpot when it signed an agreement with Amazon in August to have BNPL as an option for customers shopping on Amazon. In November, that relationship became formalized, with Affirm signing on to become Amazon’s exclusive BNPL partner until January 2023.

These moves went a long way in assuring investors the company is working on addressing the revenue concentration concerns. For example, for the quarter ended November (Affirm’s Q1 2022), Peloton’s contribution to Affirm’s Gross Merchandise Value stood at 8%, compared to 29% in the year-ago period.

Gross Merchandise Value (excluding Peloton) increased by 138% Y-o-Y. Today Affirm has no merchant besides Peloton that contributes in excess of 5% to the GMV. That was good enough news, and the company was rewarded by its shares hitting a record high of $176.65 last month.

Suddenly, BNPL became a buzzword. In August, Block, formerly Square and founded by Twitter’s ex-CEO Jack Dorsey, acquired Australian BNPL pioneer Afterpay for a whopping $29B. In September, PayPal acquired Japanese BNPL unicorn Paidy for $2.7B. Apple, too is collaborating with Goldman Sachs for its own version of the service.

In The Interest Of The “Small Guy”

Where there are end consumers and their monies being handled, there’s bound to be regulation to protect the “small guy.” All this brouhaha over BNPL attracted enough attention from the regulators, and it seems the party is suddenly unraveling.

Last week, the Consumer Financial Protection Bureau opened an inquiry into BNPL programs. The financial regulator is concerned about how BNPL accelerates debt accumulation among non-finance savvy consumers. A distinct lack of regulatory data and transparency in how payment providers harvest and use consumer data are also issues that the CFPB is concerned about.

Practices surrounding data collection, behavioural targeting, data monetization, and the risks these may create for the consumers are top-of-the-mind for CFPB. The regulator asked companies such as Affirm, Afterpay, Klarna, PayPal, and Zip to submit information regarding the risks and benefits associated with their products. CFPB’s findings will be published at a later date.

Analysts have chimed in, saying regulatory oversight will be a significant headwind after the pandemic-fueled growth in BNPL customers across all these players. In addition, alarm bells are ringing that any regulatory cracking of the whip will decelerate this growth story.

In addition to the US and Australia, the UK has now brought BNPL companies under the purview of the Financial Conduct Authority (FCA). Going forward, in the UK, BNPL players will be required to conduct affordability checks on customers before lending money to them. The customers will also be able to escalate any complaints to the Financial Ombudsman.

For Q1 FY22, Affirm reported a net loss of $306.6M. Zip’s FY2021 pre-tax losses came in at $518M. Afterpay lost A$194M for the full year (Vs. loss of A$26.8M in 2020). The shares of 15 listed BNPL firms in Australia are down 36% on average as of the 12-months ending November 30.

The timing of regulatory intervention may be right for the customers, especially for youngsters, who may spend more than they can afford. However, for firms like Affirm, the risk may have gone down on revenue concentration, but it has come back like the mythical Hydra in the form of regulation. The lesson for Affirm and its brethren: Never underestimate the “small guy!”

Market Reaction
AFRM ended at $103.63, up 6.43%. Shares rose for the first time in four days and are up 6.6% this year.

Company Snapshot 📈

AFRM $103.63 +6.26 (6.43%)

Analyst Ratings (13 Analysts) BUY 54%  HOLD 38%  SELL 8%


Newsworthy 📰

Curbs: Walgreens, CVS limit how many at-home Covid-19 tests customers can buy (WBA +2.31%)

Strong: BlackBerry revenue beats estimates as cybersecurity demand stays strong (BB +4.17%)

Nod: Microsoft’s $16B Nuance bid gets EU antitrust approval (MSFT +2.31%)


Later Today 🕒

  • Cintas Corporation Earnings (CTAS)
  • Paychex Inc. Earnings (PAYX)
  • Arista Networks Inc. Earnings (ANET)
  • CarMax Inc. Earnings (KMX)
  • Live Ventures Inc. Earnings (LIVE)
  • 7:00 PM IST: Gross Domestic Product Revision
  • 8:30 PM IST: Consumer Confidence

Today’s Market Terminology: Cost Averaging

Cost averaging is a concept when you buy a stock in small bunches, instead of lump-sum. This helps in reducing the average cost of your investment


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