Affirm Holdings

Goodbye poor.

Outlook meh. Chart meh

Money may go into $AFRM (-0,9%)

Affirm Q3 2024 $AFRM (-0,9%)

Financial performance:

• Revenue: Affirm reported revenue of $698 million for the first quarter, an impressive 41% increase year-over-year. Revenue to GMV (total number of merchandise sales) ratio increased to 9.2% compared to 8.8% in Q1 2024, indicating improved pricing and efficiency in monetizing GMV.
• Net income (loss): Affirm posted a net loss of $100 million for the quarter, but this is an improvement of $72 million year-over-year. Despite the loss, the decrease in the deficit shows a trend towards greater financial stability.
• Adjusted operating income: Adjusted operating income increased by USD 70 million to USD 130 million, representing an adjusted operating margin of 19%, compared to 12% in the first quarter of 2024.

Balance sheet overview:

• Loans held for investment: Loans held for investment increased 39% year over year, a major contributor to the increase in interest income.
• Provision for losses: This amounted to USD 351 million, representing 5.7% of loans held, and shows that Affirm is adjusting its provision for loan losses in line with its growth strategy and market development.

Income details:

• Operating income (loss): Operating income improved by $77 million to a loss of $133 million, compared to a loss of $209 million in the prior year. This improvement reflects better cost efficiency and successful cost management.
• Revenue less transaction costs (RLTC): RLTC grew by 34% year-on-year to USD 285 million, representing 3.8% of GMV and indicating solid profitability of the operating businesses.

Cash flow overview:

No specific details on cash flow have been provided in these reports.

Key ratios and profitability metrics:

• Operating margin: Operating margin improved significantly to (19%) from (42%) in Q1 2024, indicating a significant reduction in operating losses.
• Adjusted operating margin: Adjusted operating margin increased to 19% from 12% in the prior year, reflecting improved operating efficiency.

Competitive position:

Affirm recorded competitive delinquency rates on loans over 30 days compared to other consumer lenders. This demonstrates a strong position in managing credit risk and supports confidence in Affirm's risk management practices.

Forecasts and management commentary:

• Outlook for FY2025: Affirm expects GMV to exceed $34 billion and expects an adjusted operating margin of at least 20%. Fourth quarter 2025 target includes achieving GAAP operating margin, underscoring profitability target.
• Profitability target: Affirm plans to be GAAP operating income positive by the fourth quarter of 2025, supporting its long-term profitability strategy.

Risks and opportunities:

• Risks: Risks include securing financing, managing credit risk, and the potential impact of macroeconomic conditions and interest rate fluctuations.
• Opportunities: Affirm sees opportunities in the expansion into new markets and product lines, although these are not expected to make a significant contribution to growth in the 2025 financial year.

Summary of results:

Positives:

Sales growth: Sales increased by 41% compared to the previous year, showing strong business expansion.

Improved operating profit: Operating profit improved by USD 77 million, highlighting efficiency in cost management.

Increased adjusted operating margin: Margin increased to 19%, providing Affirm with a healthier financial position.

Successful pricing strategy: Pricing initiatives resulted in higher interest income and improved monetization.

Competitive credit quality: Lower default rates positively differentiate Affirm from other lenders.

Negative aspects:

Net deficit: Despite improvements, Affirm remained in deficit with a net loss of $100 million.

High operating expenses: The cost of corporate guarantees and share-based payments weighed on the result.

Increased provisions: Provisions increased due to higher loan origination and timing of loan sales.

Low growth due to new initiatives: Product launches and market expansions are not expected to make a significant contribution to growth in the 2025 financial year.

Economic risks: Potential impact from economic uncertainties and interest rate changes could affect demand and profit margins.

Affirm
$AFRM (-0,9%) has announced its first international expansion and launched its "Buy Now, Pay Later" service in the United Kingdom 🇬🇧 - CNBC.

Photo: Yahoo

Earnings next week

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Part 2:

The evolution of embedded finance: banks at a crossroads

Reading time: approx. 4 minutes

The emergence and growth of embedded finance have presented banks around the world with a strategic decision: Do they give up "simple" payments and payment processing and focus on more more complex services such as asset management, M&A and IPOs? Or do they continue to build the financial infrastructure to keep pace with fintechs and tech companies?

To grasp the deep understanding of embedded finance and the role of banks, we need to analyze the change in the financial world and the shift in power between traditional banks and tech giants.

Embedded finance: redefining the role of banks

Historically, banks have been banks were not only the main players in the provision of financial products, but also the sole point of access to these services. However, the digital revolution, led by tech giants and fintechs, has profoundly changed the relationship between bank and customer. Embedded financewhich enables the seamless integration of financial services into digital platforms, poses a major challenge for banks.

Technological platforms take over payment processing: Companies such as Stripe, Adyen and Square offer comprehensive payment infrastructures that enable platforms to offer financial services without the direct involvement of a bank. These companies are often faster, more flexible and, above all, cheaper than traditional banks.

Banks as infrastructure providersSome banks have opted to take on a strategic role in the background. They provide the infrastructure for payments and loans but leave the customer experience to the platforms. Examples of this are banks such as Hypothekarbank Lenzburgfintechs such as neon to offer banking services without having a banking license themselves.

Retreat into more complex services: On the other hand, there are banks that specialize in high-quality, advisory-intensive services such as asset management, IPOs and M&A transactions focus. These services require deep expertise, regulatory experience and trust - factors that tech companies struggle to replicate.

Which direction are banks taking?

Banks are faced with a strategic choice between (mainly) two models:

1.) Becoming an infrastructure provider:

Some banks no longer want to be the central interface to the customer, but focus on providing a robust infrastructure. BBVA and Goldman Sachs for example, have started to provide their infrastructure via Banking-as-a-Service (BaaS) to other companies. They provide platforms with the necessary financial tools without being in the foreground. The advantage: they can earn money from a growing number of transactions without competing directly with tech companies.

Advantages for the banks:

• Scalability: Banks can use their existing infrastructure more efficiently.
• Revenue through fees for providing payment and credit solutions to fintechs or other companies.

Disadvantages:

• Fewer direct customer relationships.
• Greater reliance on partnerships with tech companies.

2) Focus on advisory-intensive services:

Another group of banks is focusing on high-value financial servicesthat require personalized advice and specific know-how. The UBS is an example of this. By withdrawing from the mass business with simple payments and loans, it can concentrate on asset management and corporate finance where margins are higher and there is less competition from tech companies. The divestment of "Swisscard" to AmericanExpress may be an indication that UBS wants (or needs?) to focus on its core business.

Advantages:

• Higher margins for specialized services.
• Greater trust and long-term relationships with wealthy private clients and companies.

Disadvantages:

• Risk of losing bulk business and therefore volume.
• Dependence on high-end clients who scale back their assets or activities in times of crisis.

Technological change and competitive pressure

A key driver of this change is the technologization of the financial sector. APIs enable platforms such as Amazon, Airbnb or Shopifyto offer financial services without a bank in the foreground. These developments have not only made the banking market smaller, but have also put pressure on bank margins increased.

One example of the influence of embedded finance is the shift in credit and payment options. Klarna offers "Buy Now, Pay Later" (BNPL) models directly at the checkout of online retailers. Although the customer thinks they are paying the merchant directly, the actual credit processing takes place in the background via Klarna. The merchant receives their money immediately, and Klarna earns from the customer's installment payments. This underlines how tech companies have taken over the traditional model of the credit business without being a bank themselves.

Banks at a crossroads?

The future of banks will depend heavily on the strategic decisions they make. The The loss of direct customer contact in payment transactions through embedded finance is a challenge, but banks can use this change to either focus on infrastructure or high-value services specialize in either infrastructure or high-value services. However, both require massive investments in technologyto remain competitive.

In the next part of the series, we take a closer look at how the technologies behind embedded finance work and how banks and companies can use these systems efficiently to consolidate their position in the market.

Let me know what you think! - Leave a comment!

Happy investing! 😊

GG

$AXP (+0,36%)
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BONUS:

The global embedded finance market in 2023 was estimated at USD 83.32 billion and is expected to grow at a compound annual growth rate of 32,8% further growth. This growth is due to the increase in smartphones and internet access worldwide.

Stay tuned, the series continues! ♥️🔥

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$AFRM (-0,9%)

💳 The card game of the giants: Visa, Amex, Mastercard - Who will win the payment poker game? 🃏

Company portraits

$V (+0,05%) was founded in 1958 and is headquartered in San Francisco, California. The company operates one of the largest electronic payment networks in the world and is particularly well known for its credit, debit and prepaid cards.

$MA (+0,02%) The company was founded in 1966, is headquartered in New York and is one of the leading global payment providers alongside Visa. It enables payments with debit, credit and prepaid cards via its own network.

$AXP (+0,36%) (Amex), founded in 1850, is a renowned financial services provider headquartered in New York. In addition to payment cards, Amex also offers extensive travel services and is known for its exclusive products, which appeal primarily to affluent customers.

Historical development

Visa emerged from the BankAmericard, a credit card originally issued by the $BAC (-0,02%) was issued. The company was renamed Visa in 1976. The company has been listed on the stock exchange since its IPO in 2008.

Mastercard was created in response to the success of BankAmericard. It was originally a merger of regional bank card networks. The company was listed on the New York Stock Exchange in 2006.

American Express began as an express delivery service and later expanded its offering to include financial and travel services. In 1958, the company introduced its first store card and has since developed a range of exclusive card products, including the famous Centurion card, which was launched in 1999.

Business model

Visa and Mastercard operate as pure payment networks that facilitate transactions between banks, merchants and cardholders. They charge fees for each transaction, but do not bear any credit risk.

American Express acts as both a payment network and a card issuer. As a result, Amex benefits not only from transaction fees, but also from annual fees and interest on outstanding balances. Unlike Visa and Mastercard, Amex bears the credit risk of its cards.

Core competencies and future prospects

Visa and Mastercard stand out for their global reach, technological innovation and strong brand presence. Both companies are investing heavily in digital payment technologies and security systems to consolidate their market position.

American Express, on the other hand, is focusing on its particular strength in the premium segment, with first-class customer service and an attractive bonus program. Amex is also increasingly investing in digital solutions and expanding its offering for business customers.

Strategic initiatives

1. expansion of its presence in emerging markets

2. further development of innovative payment technologies such as contactless payment and blockchain

3. cooperation with fintech companies

4. strengthening cyber security

Market position and competition

Visa leads the market as the largest global payment network, followed by Mastercard. Together, these two companies dominate the market for payment networks.

American Express holds a strong position in the premium segment, but is facing challenges, particularly due to the comparatively lower acceptance among merchants, which is attributable to Amex's higher fees.

All three providers are facing increasing competition from new digital payment services such as PayPal, Apple Pay and innovative fintech start-ups.

Total Addressable Market (TAM)

The market for digital payments is growing steadily. Ongoing digitalization and the global trend towards cashless transactions offer Visa, Mastercard and American Express considerable growth potential, particularly in emerging markets, making it almost the global payment market.

Share performance

Over the past few years, all three companies have shown impressive stock performance, with Visa and Mastercard generally outperforming American Express. Visa TR over 10 years is 454%, Mastercard TR over 10 years is 612% and Amex is at a 10 year TR of 259%.

For the performance (company numbers), better view and more check out the free blog: https://topicswithhead.beehiiv.com/p/das-kartenspiel-der-giganten-visa-amex-mastercard-wer-sticht-im-zahlungspoker

Conclusion

With Mastercard and Visa, there is actually a duopoly in the market, which is why it is difficult to choose between the two. In terms of performance, Mastercard has done better, but is also more highly valued. If you can get hold of the shares at a good price, you should go for it; there is not much more you can say.

The situation with American Express is more complex. Although Amex has a network, the company operates somewhat differently and has different risks. Things are going well at the moment, but we have also seen less good times in the past. I therefore consider Amex to be an interesting investment, but less so for me personally. Amex seems too much like a bank in payment transactions, and there are other options that are more attractive to me. There would be $AFRM (-0,9%) Paypal, Klarna or Co would be more interesting.

Earnings times today (+6h for CEST) ⏰

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