Chit Chat Stocks - Affirm (AFRM) with Simon Erickson

Episode Date: August 19, 2021

This week we are joined by Simon Erickson, founder of 7Investing. We discuss Affirm, a digital and mobile-first e-commerce platform. Affirm is most commonly known for how it enables consumers to pay for a purchase over time. Simon brings his expert knowledge of Affirm for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Simon's work? Follow him on Twitter: https://twitter.com/7Innovator?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Discovery | (5:32) The Business | (9:35) Management | (19:42) Further Questions | (20:40) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome in. This is the Thursday deep dive episode on Chit Chat Money. We have the second show in this new format. Last week we had Chris from Growth to Value back on the show and he talked Fiverr. So if you haven't heard that one, go listen to that one. But this week we have Simon Erickson talking Affirm, one of the famous and biggest buy now pay later companies out there. Simon is the founder of Seven Investing, a research service that does seven stock picks a month or research reports a month,

recommendations slash research reports. You can use our link in the show notes or code CCM to get $10 off the first month of the service. You've heard them on the show before. You've heard the analyst team on the show before. We really love working with them. And you can see by listening to the interview that it's a great service. They do great work over there. during this episode we go over the history of a firm we go over how their business model works

management financials important metrics industry tailwinds valuation promising partnerships basically all the things that you'd want to know before going to research this company further it was a great interview simon knows a firm well even though he did say he hasn't fully researched the company to the level he would have if it was going to be a recommendation on 7investing. But you can listen to the show and see that if this isn't even the level that a recommendation would be at, that it's still pretty strong. And he knows this company, I would argue, as well as anyone out there. But before we get to the interview, we have to talk about our sponsor for the Thursday show, Quarter. Quarter is the new way of doing company research.

The first mission is to enable access to conference calls, investor presentations, transcripts and earnings reports in a frictionless mobile application i've downloaded the app ryan has downloaded the app it is a great way to listen to conference calls you can speed it up to one point at 1.1 times 1.25 times speed as you know the conference calls can get a little bit slow sometimes you can skip right to the q a they have it all uploaded as fast as possible and quarter best of all is 100 free uh you include companies from 12 markets today so they're really trying to go around the world and they're trying to add more by the end of this year and i think probably over time as many as they possibly can they prioritize requested companies so you can request

that easily in the app and they have a lot more in store for the back half of the year so make sure to follow them on twitter at quarter underscore app that is at capital q u a r t r So no E, it's spelled Q-U-A-R-T-R underscore capital A-P-P. All right, let's get to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast.

Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Today, we are welcomed by our friend, Long, I guess, I don't know what time, how many times has he been on the show now? Five, six times, maybe.

Something like that. Simon Erickson is the founder of 7investing. I guess let's start there. So how's 7investing been going? Pretty good, Ryan. In fact, I think 7 will be the golden number when I come on for the seventh time for your show, right? We should keep track of when that one is.

Yes, yes, exactly. We'll have to tally it up. And then when we get the seventh one, it'll have to be some extra special show. The golden episode, the seventh appearance. It's going well. Yeah, we're having a lot of fun. we've kind of dedicated our mission to empowering the individual investor at 7investing.com. We always take a long-term buy and hold approach. We're completely transparent with all of our

returns for all of our recommendations. And I think that this kind of takes away a lot of the anxiety of, you know, the market kind of thinks, oh, are we in a bubble? Oh, why are Chinese tech stocks selling off? You know, there's all these kind of anxieties about what's going on on a week-to-week or month-to-month basis. But we've really enjoyed every time we make a recommendation, we have the intent of holding it indefinitely. And I think that that's really helped a lot of individuals kind of find great companies, figure out what's right for them, and then put those in their own portfolios and make their own personal decisions. It's been real rewarding. We're in 94 countries around the world right now. And we just launched a student program, which is more

educational. It's 80% off our annual rate for anyone who's in a university or a academic institution. And we've also got some fun personnel announcements to be making here pretty soon next week. So we've got a lot of exciting news that's keeping us busy at 7investing. All right. Well, stay tuned for that. I do like how you have the variety of different sectors that you cover with all the analysts. I like the updates that you have on the companies. Say there's some overlap for that. I follow the updates. Say if there's earnings reports, news announcements, that's a great addition to the service as well. And this is a perfect time to plug our code CCM if you're signing up for 7investing.

but let's, today we're going to be talking about Affirm. So I guess, how did you find Affirm? And then how long have you followed it? I think they've been public now for what, roughly six months? Recent IPO. Yeah. Yeah, that's right. Ryan, I played follow the leader on Affirm. There are a couple of times that I follow good leadership teams and when they have publicly traded companies or recent IPOs, it's worth paying attention to. And so for a Ukrainian born founder and CEO of Affirm, Max Levchin. He's one of those leaders that really is on my radar. Chat with him a couple of years ago at a financial conference. And of course, he goes back to the PayPal mafia and was the CTO of PayPal back when it was founded in 1998. And I think that he brings

a skill set that is applicable for what Affirm is trying to do. If you don't mind, I'd like to set the table a little bit about kind of his background and the history of PayPal and why I'm so interested in this. Definitely. Yeah, that'd be great. Yeah. Yeah. So Max Levchin, you know, again, CTO of PayPal. Back in the days, PayPal was just kind of such an innovative company for transferring money over the internet, right? It was necessary for e-commerce and for this, you know, internet-based economy we were creating, where if I wanted to send Brett some money, I didn't necessarily have to have your bank routing an account number. I can just say, hey, what's your email address for your PayPal account? And we make it super seamless and super

easy to do that. But the problem, as anybody who was experiencing the internet in the late 90s, early 2000s knows, was the massive amount of spam and fraud that was all over the internet. And so PayPal basically came to Max and said, hey, Max, you're CTO, you've got to fix this problem. And right now, it was actually costing PayPal $2,300 an hour in fraudulent activity that was taking place on their site. These are spam bots that are trying to get people to send them money, fraudulent activity, stuff that was not real people reaching out to other real people. And so what Levchin does is he creates basically the precursor of what became Captcha, which is kind of now anyone who knows when you log into a site, you've got to pick out the pictures of the trees or the stoplights to show that you're a real user, right? What is this number?

What does this word say? Stuff like that was a great way to detect bots and separate out the real people. But then he also built some algorithms to really identify the abnormal patterns in activities that were taking place of saying, hey, we're flagging this. This looks like this might be spam or this might be fraud. And so the reason all of this is important is that goes from making PayPal a business where fraud was costing him $2,300 an hour right at its start to being the most trusted and safest and secure platform for trading money across the internet today, which is now trading,

I'm sorry, which is now transacting a trillion dollars a year in payment volume. And you see what he did with PayPal. And I think that even today, PayPal is something like a quarter of the industry's average for fraud rate. I think it's something like 30 basis points today, which is still a quarter of the industry average when you look at it out there. And so the reason I bring all of this up is I've followed Levchin to Affirm, which is now a publicly traded company, which is at the forefront of this trend, a second trend that Levchin's been at the forefront of here. If PayPal was at the beginnings of the digital economy and trading money over the internet. Now, a firm is kind of at the beginning of this trend of buy now and pay

later. You've heard these installment payments. You've heard of kind of an alternative to credit cards out there. I think that his ability to spot the outliers and sort out the bad loans and the people that shouldn't be financing or paying in installments is going to be a huge technical advantage for a firm. And we can talk about that later, but I think that kind of the framework that I've used of why this is interesting is we see a trend developing. We've got a great leadership team in place. And I think that's going to form some competitive advantages for a firm going forward. All right. And do you want to go maybe in an overview of how the business works, go through maybe how buy now, pay later works? And don't worry about missing anything.

If there's anything that we're still wondering about, we have some follow-ups on that as well. Sure. Yep. So you buy something online, say you want to go out and you want to buy a Peloton bike. And at the very end, you go to the checkout screen and it says, OK, how do you want to pay for this? The traditional options are always there. You can pay using your credit card. You can pay using your PayPal account. But now we're starting to see a third option emerge. Right. This buy now, pay later. You'll even see Peloton is partnered with the firm that you can actually say, OK, I want to pay this off over a period of three months or six months or 12 months or 36 months, depending on what a firm thinks that you are eligible to qualify for. And so right up front, they're going to disclose to you exactly how much you'll be paying in interest. There's no hidden

fees. There's no late payment fees. It's deducting it directly from your account balance that you have for your bank account. And it's kind of just this new transparent way of people saying, I want to break this up and pay for larger purchases over time. And this is incredibly interesting because the industry that we're in today, credit card companies every year are making $120 billion off of just the fees for interest. And then on top of that, they've kind of created another $15 billion industry that's off of the fees that consumers were not expecting. Late payment fees, non-conforming fees, things that you didn't expect that you were going to have to pay over time. And so what Affirm has done is it has bypassed the typical way of kind of doing consumer

credit checks and FICO scores and a lot of the other ways that banks have learned about consumers to lend them money or credit card companies have learned about consumers to give them credit cards and say, hey, we're going to look at some alternative data points to say, first of all, are you someone that we think is going to pay back these installments over time? And if you qualify, there's an app that you can use. You know, Affirm has got an app that you can use for making purchases that align directly with certain merchants, like we talked about with Peloton, or you could just go on and say, hey, you know, where else could I buy things and do this in installments?

So it's really interesting. It's opening up a whole lot of more retail transactions to a buyer group that doesn't want to pay all at once at the very upfront stages. Now, why would a business want to use them? because I think the big concern that people have up front is that a business, why would they want to not get all their money right up front? What value does a firm have for the merchants? That's a great question. And just to kind of clarify, a firm is making money from kind of two sides of a network here. In addition to charging interest rates to the consumers

who are making those installments and paying them out over time, a firm is getting a chunk from each one of those. As you mentioned, Brett, they're also charging the merchants who are selling those items. It's typically a $0.30 per transaction plus 3% to 6% of the total value that is being sold. So you think about something like a treadmill, like a Peloton bike, an airplane fee, a car, anything that's a large purchase, the merchant is giving up a good portion of that just to a firm in exchange for having these installment plans. But the value proposition for them is they're getting more orders and they're getting an ecosystem of buyers that otherwise wouldn't be able to pay for it or didn't have a credit

card to pay for it. They've disclosed that they believe that their annual order volumes for merchants is up 85% just by offering the Affirm as an option at the checkout. They're reporting a 20% increase in repeat purchases of consumers who are buying from those merchants over time and a decrease in the checkout time of 30% by having a firm as a simple solution. So it's consumer convenience more than anything that they say, hey, I'm set up with a firm. I want to use my Affirm installment plan to pay for something. And then what else can this open the doors for me to buy over time? So greater retail transaction frequency for the vendors. So we're fairly familiar with afterpay.

It's something that we've looked at before. But if I'm not mistaken, afterpay is interest-free. It sounds like a firm is charging interest. Why is that? Is it just because it's the larger purchases? There's two sides to the network. If you are doing a 0% APR or interest-free, you're still getting paid by the merchants who are offering that, right?

So it's all the relationship-driven. And sometimes afterpay or a firm will forego the interest in exchange for getting the merchant fees that they're collecting from the people that are selling it. The average APR for the last fiscal year for a firm was 18%. That goes between 0% and 36% generally, depending on the timeframe and the size of the purchase and the profiling that they've done on the consumer that is making the installment plan over time. Right. And one of the big things that the buy now, pay later companies like Affirm kind of say some of their secret sauce is they're able to identify who is going to be a quality customer, who is not going to not pay, if I'm saying that right.

Or sorry, who is going to make their payments and who is going to not. And then they'll give the proper amount of leniency to each one of those. Correct? It's really the neat part of all of this is the secret sauce of figuring that out. exactly like you said, Brett. They say that they're checking more than 80 data points, which includes the typical stuff we've gotten used to, right? The transaction history you have, did you pay off your credit cards in time? Did you pay your mortgage on time? And stuff like that is already being looked at by banks and credit card companies. But they've also taken some interesting alternative points too, like social media. What do you claim your job title is on LinkedIn? Did you pay back your rent and your utilities in a timely manner? What is the

context of this purchase? Are you buying something that's worth $3,000 or something that's worth $30? And then they're using machine learning not only to predict the ability of a consumer to repay, but also suggest other vendors that might make sense for you if you do have the Affirm app installed on your smartphone. So if you guys are in sports, I know that you guys are both football players. Affirm might know that based on your social media posts or other data points it's collecting and say, hey, Ryan, hey, Brett, I see you guys are fans of the Seahawks. By the way, I don't know if you are fans of the Seahawks, but I know you're from Washington. Yeah, that's correct.

And so I might recommend vendors that has a relationship within that area and say, hey, we figured out you might be interested in stuff like that. So it's kind of a win-win from both sides of that network. Okay. And I have one more clarification. I know Ryan might have another one. Are they still built on the Visa and MasterCard rails? I think it's something that people get confused about as well. Yes, that is correct. And they even have credit cards that you can use, a plastic credit card that you can use with the firm for anything that would be on the Visa rails and then use the installment plan, but it would still be accepted in the same merchants. Exactly. Okay. Do you have one, Ryan? Yeah. Well, I was going to say to the,

I know some part of the big value proposition with Afterpay was that Afterpay.com kind of served as a good lead gen tool. Does a firm have something like that or is it kind of just a plug in? I think that's what he's saying with the Seahawks type stuff. Oh, okay. It's okay. It's also getting more and more integrated. I think that maybe we'll get a chance to talk about partnerships later in the conversation here, but a firm is kind of, for the merchants, it's not just a payment option. It is a lead gen option for them of saying, hey, we can go out and find more consumers for you.

That's why Shopify is certainly interested in partnering with the firm right now. Okay. It makes sense. I guess what's the big, there's a lot of buy now, pay later providers. I remember someone kind of showing me. There's a few dozen at least. What's the big value provider or differentiator between a firm and some of its competitors? Well, the big news was probably Square buying Afterpay, right? I mean, $29 billion acquisition that just took place.

And I think that kind of puts a floor on valuations for any of these companies of saying, hey, at any time, an independent company like a firm could go out and get bought up just like Afterpay got bought by Square. It's going to be part of a larger ecosystem, whether that's a bank, whether that's a company that's got a tech platform like Square does with Cash App. I mean, there is interest in the relationships that these kinds of companies are building. I would say the actual answer to the question, yes, it is a competitive market. Yes, there's a lot of people doing this, but it's kind of synonymous with like, why do you use the bank that you have. Why do you have Chase Bank or Bank of America or Wells Fargo or whoever

you've been banking with when you know there's other options out there? They're all offering you money up front if you switch your checking account to them. So why do you stay? And I think it's just kind of you've, for the most part, people stay with their bank because they've been with them for so many years. I know I've stayed with my bank because I've just had the relationship with them. Pretty decent customer service. I feel like I trust them and I've been, for the most part, pretty happy. And I think that this is the same answer for why people want to stick with Affirm when there are other buy now, pay later options out there, is trust. We've seen that Affirm has an NPS score, a net promoter score of 78. That is very high. That's right up there with Tesla and

Apple. It kind of shows that when there's transparency for the consumers and there's an increase in lift in sales for the vendors, it is a relationship that is valued for both parts of the network. And I think that kind of shows why a firm is embedded and why it's signing these partnerships out there. So yes, definitely competitive market. Definitely, there's other options out there. But at the end of the day, you kind of want somebody you can trust and you can count on. I think Affirm's proven to be one of those companies. Okay. One more thing we want to talk about is the management and ownership. You mentioned Levchin, or I think I'm getting that right, Levchin, or however you pronounce it. Is there

anything people should know more about management? And is there anything people should know about the ownership of a firm? Yeah, I think Max Levchin is the one that brought me to this company. He actually wanted to just be an investor at first. He said, I've got plenty of other stuff going on. you know, I'd rather just kind of be one of the funders. I like what you guys are doing. I'm interested in this. But then because of his experience with PayPal and he really knew the ins and outs of how to do this and the algorithms and everything else, he actually did take on the CEO role. I'm less familiar with a lot of the other leadership of the company, including the ownership stakes. I have to double check on that and get back with you guys. But Legend is more

than anything what drew me to this. I think that he's kind of the guy you want to bet on in this race. Okay. That makes sense. All right. I think we're going to hit a quick ad break and then we got more questions on the back half. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high-speed wifi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. This episode is brought to you by KPMG.

As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. Okay, welcome back in the second half. We've got a few more, I guess, specific questions to affirm. And then also, I kind of want to talk about the economics. So what do the financials look like? How much revenue do they generate? Or sorry, Do they generate profits as a percentage of the revenue right now? Kind of margins, margin profile of the business.

What does that look like? Yeah, sure. So some important metrics that I think that anyone interested in this business should follow is, first of all, the gross merchandise volume that's being sold over a firm's platform. Again, a firm is, to be clear, what's going on here is a firm is paying the merchants for the price of whatever it is that they're selling that they partner with, minus the discount that they're getting for stirring up the sale. And then they're taking on the risk with consumers paying them back.

So consumers are paying a firm. They're not paying directly to the merchant anymore. They're taking on those loans. They're taking the credit risk for it as well. And so the gross merchandise volume right now, we're kind of looking at about $10 billion on an annual run rate for a firm of GMV. And when you consider that e-commerce is now a $600 billion business, I mean, we're talking maybe less than 2% penetration from somebody who developed PayPal, who's doing a trillion

of total payment volume now as well. And so I think the GMV is something we should keep an eye on. That's one metric that's very important. That grew 83% year over year for a firm. When you take out Peloton, who's got some challenges right now that we can discuss in a minute, it was actually more than 100% if you take out the Peloton percentages of that. They're working with 12,000 different merchants. Those are the people who are selling and offering a firm as an option for payments. And they have more than 5 million consumers who are approved and are purchasing things with Affirm's installment plans. And the average order value of something purchased on Affirm, would you guys like to guess what the average value of something purchased is?

I say they have Peloton concentration. So I'm saying it's going to be high. I'd say $300. dollars i could be way off what do you think three hundred dollars yeah because the peloton the customer concentration i think that's going to skew it higher what do you think right higher higher i i would say like 1500 or something like that am i way off so interesting you guys actually split the difference almost it was 564 dollars that's high still though yep and that's falling a little bit as they're kind of opening up uh less expensive items like you said it did was heavily concentrated with Peloton and more expensive stuff for a while. But when you're integrating with Shopify, which is allowing a whole bunch of different

items to be sold over the platform of all sorts of industries, they're also working a lot more with kind of travel and flight providers. Expedia is one of those. Plane fares are expensive, but that's kind of right around that $600 price point. It's interesting to see how that's going to trend over time as well. And then the other question I have for you guys is, are you actually Seattle Seahawks fans? Was I completely off base with that one?

No. we are we are we are yes i want we're not diehards but we're pretty serious fans i guess you know watch every game so middle of the pack middle yeah yeah what is the uh what's the take rate for a firm on the gmv so it all depends on uh so it's going to be between three and six percent of the of the order size for the merchant and then the interest rates will be dependent on a lot of different factors right how long is the term who's borrowing how much is it things like that Typically between, like I said, a couple of percentage points or even up to 30% APR. Okay.

And one thing I remember looking at after pay is they had tough, I believe, if I'm remembering it right, working capital structure where they have a little bit more receivables than payables. If I'm remembering that correctly, does a firm have that same thing? And how much capital, like what are the capital requirements? Is there going to be some money kind of stuck in this business that they have to reserve for loan losses all the time? Yes, that's the right question to ask, Brad.

So the company is primarily funded by debt. They actually just had another securitized loan that they had. Keep in mind, this is a business that's taking the risk, right? So they've got them on the balance sheet. They sometimes are selling those off. They're securitizing for other options to other investors that want to take that risk off of their balance sheet. But they're holding $4.2 billion worth of loans, right?

So this is separating out a firm from others who might just be the middleman. You know, if you look at something like Upstart or a company that's kind of passing loans on to other people for consumer loans. A firm is holding a lot of the risk on their own balance sheet. And that's good because when you've got somebody like Max Lebschen, who's able to minimize the allowance for bad delinquent accounts, you want to leverage his skillset, right? You want to be able to say, okay, we want to take a larger cut of this because we think we're actually making the good loans to the people who are going to pay it back over time. To the question about the capital, 95% of the financing is coming from debt, securitized loans and things like this.

5% is coming from equity, which is very low. And I think that it kind of shows that as this gets larger and larger, and the balance sheet gets stronger and stronger, you're going to have more options of people that want to loan money to a firm. And of course, that's going to allow them to make more loans out there for these installment plans because they're taking on the risk for it. Another metric that I think is really important too, that just before we jump past this section is in 2020, just buy now, pay later apps in general, right? So when you include Afterpay, when you include Affirm, when you include all the other people that are doing this, the number of downloads for these types of companies was up 115% year over year.

There is definitely demand from consumers for the solution. I don't think it's just a fad that, you know, is just replacing credit cards. I think that there's a big trend that whether this is due to kind of the variable nature of how people are getting paid, the gig economy, there's more consulting now. It's less of just you get a paycheck and you want to pay for something up front. Or maybe it's the distrust in banks and credit card companies and people are getting tired of paying those fees that they got hit with over time. Something like a firm with a really high NPS score that is in the middle of a trend that's developing, I think it's in the right place the right time at least in my appreciation for what's going on out there yeah that weighing the

tailwind like you can see it there but weighing it seems like the value or sorry the incentives among the three kind of stakeholders in the business the merchant affirm and uh the customer is better than what it is with the credit card company but that's true we do need to prove that out over time and it seems like i mean it is growing rapidly but let's hit the next section here, which is basics on the valuation. So are there any kind of multiple metrics that you're looking at, like sales ratio, gross profit, or are you looking at PE or cashflow? And why, you know, looking at it, what do you think kind of maybe, what kind of growth you maybe need to see for it to be a good investment going forward? Still too early for me on this one, Brett, to

really make a meaningful decision, right? We just IPO'd a couple of months ago. The stock is down in the last couple of weeks and months, but it still is above that IPO price. I think it was $49. Someone double-checked me on that, but I feel like it IPO'd at $49 a share. Okay. And then just to reference, it's at $60,350 now. That's right. Yep. I'll check and see if it's $49. So $17 billion valuation. Of course, I think we've got the floor with the $29 billion valuation for Afterpay. By the way, Afterpay was a huge premium that Square paid for that.

There was a company that was kind of overvalued, or a lot of people were calling it overvalued to begin with. But to see kind of this ecosystem and the relationships and offering a new way for people to pay for things is of interest for those larger ecosystems like Square. We're seeing a lot of other options for buy now, pay later that are developing. PayPal is developing their own one. Goldman Sachs is really trying to get into more and more consumer financing and is developing kind of relationships with companies out there. It's always in my mind that there's a potential for an acquisition in the future for a company like this and getting access to Max, I think is a huge benefit too. What happened when did a firm

stock react at all when the after pay acquisition went through do you remember yeah i think it was up big on the news uh someone double check on the on the day of but i think it was up what 15 20 just because yes that's actually yeah that's correct if i'm looking at the chart right now yeah that sounds about right yeah and then i did i did look up it was 49 was the ipo price um but yeah ryan do you have the next yeah i mean we've got a few uh firm specific questions um so first one would be the Peloton customer concentration. Do you see that as a concern or possibly like a benefit that they have that relationship? So Peloton was a proof of concept that this was going to work and people were actually going to use Affirm for the installment payments.

It definitely showed that it works and people were interested. Peloton accounted for 25% of the payments, total gross merchandise volume last year. And it was 18% this year, right? Peloton had a voluntary recall of their treadmill. If anyone's followed the story, remember they said, hey, we're going to pull this. We think there's some safety concerns. This wasn't for the bike. As I understood, it was for just the treadmill, but they pulled that and that cost them a lot of money and it cost Affirm a lot of money. They were expecting to get from them this year. And it is customer concentration, but I don't know. I mean, Ryan, I don't think it's a long-term worry. I think that it's something you got to think about if you're looking at this

on a quarter to quarter year over year basis, but I don't think that they are overly reliant on Peloton. I'm more interested in the partnership they have with Spotify more than anything, to be honest. Yeah, and you said Spotify. Not Spotify, excuse me, Shopify. Shopify, yeah, I was going to say, I was like, Spotify. We follow that closely.

We should have, did we miss that news? I guess that does bring- More coffee needed for me in the afternoon here, guys. Yeah, no worries. But that kind of brings up the next question, which is what is, in your opinion, the most promising kind of partnership or new product they have coming down the line? I know you mentioned Shopify. If it's that,

why is it that partnership? Right. So that's a really good partnership, the one with Shopify that was initiated in July of 2020. Basically, it gave Shopify an 8% stake in a firm in exchange for being the exclusive partner for their Shopify pay installments. Now, a reminder that Shopify is kind of enabling merchants to compete with Amazon and e-commerce out there. They've got 1.7 million merchants that are already on the platform. And if a firm is the exclusive option for paying in installments, this could be very, very enticing for a firm. That's why they gave up 8% of their shares, which are kind of worth a billion dollars kind of in the stake that Shopify has in the business right now. But I think this is going

to be another one that it's going to generate a lot of interest income for a firm from the items that are purchased in installments from Shopify, not to mention giving them kind of a higher price point that they can sell things to people for because you have the option of paying it off over four installments or over 36 months installments or anything like this. So I think Shopify is probably the most interesting one. The other ones that I would be really keeping an eye as an investor is growth in Expedia and Priceline, both of which are partnering with a firm for travel bookings. You book a flight, you don't want to pay $600 up front, or you can't afford to pay for the flight up front. You can pay it over four installments, $150 a pop, and that's

not so bad. A firm's CFO mentioned on the most recent conference call that within just a year, travel has increased from 2% of their gross merchandise volumes to 11%. As you see kind of the impact of COVID fading in a lot of consumers' minds, people are booking a lot more flights these days. Still kind of some, I think, risk from that. We shouldn't forget that the Delta variant is still out there and COVID hasn't gotten completely out of our minds yet, but it does show that people are definitely booking more airfares these days. And a firm's going to definitely benefit from that as it takes off more in the future. Kind of a follow-on to that. And I don't know if you know the answer to this, but is there, does Airbnb offer some of these things?

Like, are they a target for like a firm to go after? It could be, I don't, I don't know the immediate answer. It'd be a natural fit though. I mean, certainly hotels, Airbnb, anything like that would be. What about this? I know I heard that the stock sold off on the news of Apple and Goldman Sachs offering apparently another BNPL provider or they're partnering to offer something. Do you see that as a potential threat? It's an interesting one. I mean, obviously it's specifically for Apple, which is one merchant versus 1.7 million merchants on Shopify, but Apple's huge, right? People love Apple stuff. And for Apple to team up with Goldman is definitely a risk and a threat. Goldman has a division called Marcus that is really

interested in doing more and more consumer financing, right? They've got the enterprise down. They've got the investment side of this down. Their next horizon is to win over the trust of the consumers. And keep in mind, this is hard for Goldman because what was Goldman described as the evil squid that was going to rip your face off or, you know, really a terrible image of the company from investors for years. Low NPS score probably. Right. It was not a real nice comparison where you're a vampire squid that's ripping faces off, but they want to become kind of a more trusted consumer brand. They see that if they partner with, with love brands with high NPS scores, like Apple, maybe they're going to gain some trust from consumers. And so Goldman's

trying to do the same thing, um, that, that Affirm is in this. It's definitely a risk. I think, uh, Ryan, that we should be keeping an eye on. Right. And are they, I guess you may not know this, but it's likely that they're going to do it through Apple pay, right. Or something like that. and maybe within Marcus as well. Which I believe is even opening up to things that might be purchased on the Apple platform, right? Anything that could be paid for. Apple already for their devices

has got installment payments that they can just take the risk for because Apple's a large enough company. But what if you're buying apps or buying anything through Apple? You know, it's its own ecosystem that's developed. Something like that would be a much more interesting for Goldman for sure.

Right. Okay. Or do you want to do the last one? Yeah. What do you think could go wrong? I guess if this were to turn out to be a really bad investment, what would have to happen? Well, right now, the biggest concern I would have would be if we see a tick up in bad loans. We have a lot of faith, at least I have a lot of faith, that Max Levchin has built the algorithms and the alternative data points that he's put together for quantifying each of these loans that he's making.

he's going after the right people and offering the right installment plans. You're going to pay back. If you pay with the firm, you're going to pay back what you owe them over time. You're not going to be a bad delinquent loan. And that was less than 1% of the loans that they made in 2020 were delinquent. So they're doing good so far. But with businesses like this, if you tend to try to grow too quickly or you don't have the right controls in place internally, it's real tempting to just grow as quickly as possible, right? Maybe they could juice it and say, oh, we're going to grow our revenues and GMV 150% this year, 200% this year. And that might get you a higher valuation multiple from Wall Street. But on the other hand, you've got the

other side of it. You actually got to operate this business. You've got to make sure you're not making bad loans out there and you're still keeping the high quality and keeping the merchants happy too. So I think there's kind of a trade-off between top-line GMV growth and quality of the loans that they're making when they're taking on those risks. And then the other big one would be, can they maintain that NPS score of 78? You want to have trust with consumers in this space, right? You don't want to have five or seven buy now, pay later options on your phone when you're buying something. You want to have one, maybe two. And if you're already set up with a firm and you're happy with them, they even have a way that you can actually earn interest for your balance that

you have in a firm. It's a savings account that's FDIC insured now. I mean, stuff like that is just kind of the same ecosystems that are being built out there. I compare it to Coinbase for people that want to buy or sell cryptocurrencies. It's kind of like, are you going to be the ecosystem of choice for people who want to trade crypto? That's kind of the synonymous to, is a firm going to be the payment platform of choice? if you want to pay with installments. Right. And is part of the potential thesis for a firm

is that they lock in these customers that are like 20 to 30 years old or maybe 20 to 40 years old. They may not be paying as much right now. They might just start out with a few hundred bucks, but over time, they're going to hit their prime earning years or start making good money.

And that a firm will have those customers for the long haul. Is that part of the thesis or is maybe that just overthinking it? Yep. They say that it's exactly the thesis. They disclose in their investor materials that half of their consumers are already millennials or Gen Z. And 81% of those millennials would consider purchasing financial products from a tech company. And then on top of that, the average annual spend

by repeat customers, this is kind of amazing to me, but the average annual spend for people that are buying more than one thing with a firm over time is $2,500, $2,200, as opposed to just one purchase of $564. So if you want to pay with installments, this might be the preferred way that you always pay for things, right? I'm done. Say I'm Gen Z. I'm one of the 50% that's Gen Z that's using a firm. I don't want to pay with credit cards anymore. I don't want to pay with my debit card anymore. I don't want to pay with PayPal anymore. I'm just going to start using a firm every time somebody gives me the option to do that. And if that is the case and these trends continue, I think that a $16 billion market cap is really too low for a company that has that

reputation and adoption with its consumers. One more question I have. We've seen all the stimulus payments, and it seems like at least the American consumer is in the best spot financially they've ever been in. Do you see that as a tailwind for them or maybe a potential that they're in the easiest underwriting environment that they're in and that could change over the next few years. Does that make sense at all? It does. Yeah. The positive, I mean, like, yes, definitely COVID was paying out a lot of money that people had as disposable income. The alternative is we just had the highest number of unfilled employment positions in the U.S. in the last like 20 years. I forgot the numbers. It was something like the number of unfilled jobs

that were available for hire was the highest it's been in two decades, which means there's a lot of demand for people to get into jobs. And there's a lot of money that's waiting to pay people that they can use for disposable income too. So the macro picture, I think, is still very favorable. We've got to kind of digest COVID, Delta variant. Are merchants going to be selling less because people are uncertain about the economy or their own careers and their jobs? But aside from that kind of short-term hurdle, I think it's probably pretty favorable for the American consumer. Right. It could create some short-term noise, kind of a few variables that aren't going to be there in the long-term. Yeah. Including football season.

Exactly. That's right. If we didn't buy football tickets on buy now, pay later, that could be a huge market opportunity, right? Thank goodness. Yeah. We're really pushing that top line, just you and me at Seahawks games. Yes, exactly. Exactly. All right. Well, I think that's going to do it unless you have any more questions. Okay.

Thanks again to Simon for coming on. If you guys want to check out 7investing, use that code CCM at checkout. Where can people find 7investing? We'll link it in the show, but where's the best way to come in contact with the service? It's 7investing.com slash subscribe

if you'd like to sign up today. We do not have a firm as an option yet for installments, but we do offer the fantastic pricing a $49 a month or $399 for a year. I think it's when we broke it down across the seven advisors, you're hiring us, I think for less than 5 cents an hour to find you the most innovative and best stock picks that are out there across the diverse sector of every market. So we're pretty excited about what we're doing and really appreciate you guys having me on the show too. Perfect.

All right. We want to remind our listeners that we are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions and securities discussed on this podcast. Thanks again for listening. We'll see you next time.