Hot IPO Thrives by Lending to the Unbanked
Affirm Holdings

Hot IPO Thrives by Lending to the Unbanked

Bearish investors claim there is not enough money around. Well, it appears they haven’t heard the IPO for Affirm Holdings (Nasdaq: AFRM), an online consumer finance company, is coming this week.

The San Francisco-based company announced Monday that its highly anticipated share offering will drop this week. The IPO was postponed in December as Affirm managers held out for a better deal.

And you can bet that thriftiness is likely to benefit shareholders this week.

Affirm was founded in 2012 by Max Levchin, one of the original PayPal Holdings, Inc. (Nasdaq: PYPL) leaders. Those early days put him in the company of Elon Musk and Peter Thiel, plus the guys who went on to start YouTube, LinkedIn, Yelp and Yammer.

Musk and Thiel would later make even bigger splashes with Tesla, Inc. (Nasdaq: TSLA), SpaceX and Palantir Technologies Inc. (PLTR).

This backstory is important because nothing sells an IPO like a good story … and a founder with a foothold in the so-called PayPal mafia is a great start.

A research report from IPO Boutique notes the Affirm IPO is many times oversubscribed, with extremely strong interest from institutional investors.

What jumps out is the business model.

Affirm offers an interest-free alternative to credit cards and traditional bank financing. The S-1 filing says the company’s mission statement is to empower people without credit histories or savings accounts with access to small loans.

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You might think that would not be a great business, especially in light of the global pandemic and unemployment rates near 8%.

It turns out that Affirm has facilitated $10.7 billion in gross merchandise volume since 2016. In the third quarter of 2020, the company reported sales of $174 million, up 98% year-over-year. The proforma loss of $15.3 million was less than half that of a year ago.

And in 2019, growth was also robust. Sales reached $510 million, up 93%. These numbers were helped by partnerships with Peloton Interactive Inc (Nasdaq: PTON) and Expedia Group, Inc. (EXPE). Affirm provided the infrastructure for their outreach to underbanked customers.

What Affirm is doing is important. There is a large number of Americans who have no access to credit because they don’t have bank accounts. Some reports suggest that 25% of households may fall into this category. Financial technology firms are blurring the line between big bank culture and technology with great success.

It is noteworthy that Affirm pulled its planned IPO back in December. At the time, managers watched as Doordash, Inc. (NYSE: DASH) and Airbnb, Inc. (Nasdaq: ABNB) both skyrocketed on their first day of trading. Airbnb, a home-sharing company, was priced at only $68. It opened the first day at $144.71.


Optimists will note that valuation made the company more valuable than the combined market capitalizations of Marriot International, Inc. (Nasdaq: MAR), Hilton Worldwide Holdings Inc. (NYSE: HLT) and Hyatt Hotels Corp. (NYSE: H).

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While that is true, Airbnb shareholders ultimately lost because the company could have sold fewer shares from treasury to reap the same amount of capital. Those shares may be useful in the future to fund acquisitions or simply raise more capital. It turns out that waiting a month did help shareholders.

Affirm is now set to offer 24.6 million shares at a price range of $41 to $44. That’s significantly higher than the previous range of $33 to $38.

Based on the Max Levchin connection alone, Affirm shares should be a hot new issue. At the midpoint of the price range, the company would have a valuation above $10 billion. Given that Square, Inc. (NYSE: SQ), PayPal and Intuit Inc. (Nasdaq: INTU) have market capitalizations of $101 billion, $269 billion and $95 billion, respectively, Affirm may have a ways to go on the upside.

Longer-term investors should buy the stock into weakness.

Best wishes,

Jon D. Markman

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