Affirm Holdings (AFRM 4.52%) has been one of the worst-performing stocks on the market over the past six months. Stock in the leading "buy now, pay later" (BNPL) firm is down a whopping 75% year to date, and down about 84% from its peak of $168 a share back in early November.
The stock's meteoric rise to a ridiculously high valuation last year was partly to blame for the crash that followed, but a variety of other factors contributed as well, including the broader sell-off in growth stocks, inflation, fears of an economic slowdown, rising interest rates, and rising expenses. While its revenue growth has been steady and strong, Affirm's high expenses have kept it unprofitable.
While this market is fraught with uncertainty for Affirm, there were some positive trends in its recent earnings report that bear watching.
Revenue and GMV gains continue
Affirm had a pretty solid fiscal 2022 third quarter (which ended March 31). Revenue was up 54% to $355 million, beating analysts' consensus estimate.
Gross merchandise volume (GMV) -- the dollar amount of total sales using Affirm -- was up 73% year over year to $3.9 billion. That was boosted by a 122% increase in travel and ticketing volume. Its total number of transactions grew 162% year over year to 10.5 million, while the number of active consumers grew 137% year over year to 12.7 million.
The number of active merchants that offer Affirm's service to their customers jumped from 11,500 a year ago to 207,000 -- mostly due to Affirm's relationship with Shopify (SHOP 1.00%), which Shopify just extended. The new agreement makes Affirm the exclusive BNPL provider for its Shop Pay Installments service in the U.S. All U.S. merchants offering Shop Pay Installments can use Affirm's Adaptive Checkout, which offers multiple biweekly and monthly payment options at checkout.
In sum, consumers' use of Affirm's service has been growing at an excellent pace over the past year, and its revenue has been too. The problem is its lack of profitability.
The company, founded in 2012, has operated at a net loss since it went public in January 2021. Operating and marketing expenses have outpaced consistent revenue gains. But in the most recent earnings report, CEO Max Levchin projected a "sustained profitability run rate on an adjusted operating income basis by July 1, 2023" -- or the end of its next fiscal year.
Trends to watch
There are a few different metrics that investors should monitor as the company strives toward profitability. One is "revenue less transaction costs," -- simply, what's left after subtracting the company's losses on loan purchase commitment, provisions for credit losses, funding costs, and processing and servicing expenses from its total revenue. The company views this as a key business metric, as it focuses on the unit economics of transactions. The combination of GMV growth and continued improvement in revenue less transaction costs is what will propel Affirm to profitability, CFO Michael Linford said on the recent earnings call.
"And to be really clear, we do not think that the decisions we'll take in order to get us to that breakeven or better adjusted operating income will result in any sort of slowdown-in-growth period," Linford said. "In fact, the growth will allow us to achieve it, and the focus on unit economics will get us there inevitably."
Last quarter, revenue less transaction costs came in at $182 million, up year over year, but down slightly from the previous quarter. But that figure was 4.7% of GMV, up from 4.1% in the previous quarter. That's after adding $1.5 billion in GMV from the same quarter last year -- and above management's long-term goal range of 3% to 4%.
Another metric to watch is the number of repeat users. In the most recent quarter, Affirm reported that 81% of its customers were repeat users -- its highest percentage ever. Also, transactions per average customer climbed to 2.7, up from 2.3 a year ago and 2.5 in the prior quarter. These numbers not only show greater engagement with customers, but they also help improve the unit economics. As Levchin explained on the earnings call: "The increasing rate of repeat transactions affords us several advantages, most importantly, economies of scale on fixed and transactional costs, meaningful underwriting improvements, and opportunities to deliver new products to our consumers and merchant partners at a very low marginal cost," he said.
Affirm is still a long way from being out of the woods, but it seems to be headed in the right direction. In future earnings reports, watch its growth in GMV and revenue carefully, but also pay attention to how its revenue less transactions and repeat users/transactions per customer metrics are trending.