Affirm Reports Growth in Third Quarter
The third quarter saw significant growth for Affirm, with both total product value (GMV) and revenue rising by 36% compared to the previous year, reaching $8.6 billion and $783 million, respectively. However, guidance indicates a potential slowdown in these growth rates ahead. Following the announcement, stocks experienced a decline during after-hours trading.
The performance of the Affirm card was particularly noteworthy, with GMV increasing by 115% year-on-year to $807 million, and the number of active cardholders reaching 2 million. The company maintains confidence in navigating various macroeconomic conditions, anticipating heightened consumer demand while managing approvals to ensure targeted credit outcomes during challenging times.
In the third quarter, the appeal of various spending categories contributed to 1.8 million new consumers joining Affirm’s expanding ecosystem. Despite this growth, future guidance reflects a possible deceleration due to the evolving nature of transactions, particularly with upcoming tariffs expected in March and April. This outlook contributed to an 8% drop in stock value.
CEO Max Levchin noted in a quarterly letter to shareholders that growth can be attributed to a significant portion of the company’s GMV linked to interest-free installment plans. Specifically, 44% of GMV during the quarter came from 0% APR financing, maintaining strong demand from Prime and Super-Prime borrowers.
Growth of Affirm Card
Affirm’s card segment reported a GMV of $807 million, reflecting a 115% increase from the previous year, alongside a rise to 21.9 million active consumers—up 23% year-on-year. The company has also seen its merchant base grow considerably. Charge-off rates are trending towards 3.5%, which aligns with expectations given that loan defaults remain low.
During an analyst call, CFO Rob O’Hare expressed confidence in repayment rates, indicating that the data shows a healthy financial environment among consumers. He mentioned that with a daily GMV of around $100 million, the trends appear positive. There have been no signs of stress in repayment rates, which is encouraging.
Levchin also highlighted the positive effects of 0% promotions, suggesting they enhance the brand’s presence, benefiting both Affirm and merchants. Whenever merchants propose major promotional offers, the company is eager to collaborate, believing it boosts conversions despite potentially lower immediate profits.
This quarter’s guidance anticipates revenues between $815 million and $845 million, slightly missing the street consensus of around $840 million. Last year, growth was at 48% during the same quarter.
Additional figures from the revenue report indicated a 38% year-on-year increase in General Merchandise GMV and a 26% rise in travel volumes, while electronics rose by 34%. The only categories to see declines were sports and outdoor equipment, which dropped by 14%.
Levchin remarked on the outlook during the call, indicating a slight decline from the current 36% growth and providing insights into potential growth dynamics moving forward.
Understanding the Macro Environment
Levchin’s notes to shareholders contained strategic observations about managing the business amidst varying macroeconomic conditions. He mentioned that even in mild stress scenarios, a gradual increase in arrears is expected, and more severe conditions could lead to quicker increases.
Overall, Levchin believes there will be a growing demand for flexible payment options as consumers look for alternatives that help in managing their expenses, while merchants seek strategies to make purchases more appealing despite price increases.
The firm’s model posits that in a recession scenario where credit stress escalates, a reduction in approvals to achieve target credit results could impact GMV growth by around 10% points.
To counteract these potential effects, Levchin explained that the company could adjust exposure limits and leverage cash flow underwriting based on previous experiences, especially with the volatility seen during the pandemic, which offered valuable lessons on handling external pressures.
In response to inquiries about credit reporting, Levchin emphasized the importance of establishing a positive credit history for consumers, noting that timely repayments should bolster credit records, thereby supporting future borrowing opportunities.
