Tag: Peloton

affirm S-1 Break down: Lessons on Customer Concentration $PTON

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I’m sure you’ve seen it by now. You’re checking out online and you see a notification that says, “Why pay $180 now when you can pay 6 payments of $30…”. I’ve been very tempted to use this, but actually never have. I get tempted because I view it as managing my working capital (pushing my payables), but figure there must be a catch. Most often, I see it offered by a firm called affirm (I guess, like, affirmative covenant). And affirm is out with its S-1 to go public.

If I jump straight to the punchline: a buy on affirm is really a buy on Peloton, too.

If you know Peloton’s exercise bikes, you know they retail for $2,000 to $2,500 for the new bike. You may also know that this pill becomes easier to swallow with the interest free payments. This is actually powered by affirm (see the fine print at the bottom of Peloton’s page).

affirm argues this helps merchants sell at higher price points because the sticker shock is less severe (makes sense).

I’m not buying a $2,500 exercise bike, where cheaper copycats are plentiful, I’m paying a low, low price of $64/month for 39 months!

This is what affirm calls “Merchant Network” revenue. The loans are 0% interest, so there’s not really any interest income, but affirm charges the merchant a fee for conducting a transaction on their platform.

Here’s the thing: You’re buying at what they think will be a $10 billion valuation or 18x core revenue. You’re banking on a lot of growth. With the surge of e-commerce in a year impacted by COVID, people more cautious on liquidity, it should be a major growth year. Affirm did grow revenue 98%, with merchant network revenue up 157% in the Q ended Sept.

But wait – look at affirm’s Peloton exposure. It grew faster than merchant sales. It also grew with Peloton faster than Peloton’s “Connected Fitness Product” sales. This means they are converting more of PTON’s customers. But it also means it accounted for ~70% of affirm’s growth. And if they didn’t convert a higher percentage of PTON’s customers, PTON still would’ve accounted for 60% of merchant revenue growth.

This all begs the question: is that worth paying for? The biggest pushback will be “it is early days for affirm, they’ll convert more and more merchants” but clearly consumers are using the product heavily for Pelotons and mainly for high ticket price items. And there are other competitors in the space (which I discuss at the end of this post).

Let me put it this way: non-Peloton merchant revenue, by my estimate, is just $131MM in the LTM. Is the Peloton business + this worth $10BN?

Oh, and by the way (yes – this is true for Peloton too):

I can imagine in 2023 investors watching on bated breath what will happen to this contract…

What I love about affirm is that they say,

“we believe that companies… that peddle toxic financial products and derive profit from their consumers missteps – like credit cards and other products with deferred interest – will find themselves in the shrinking minority before too long.”

Look, we have usury laws for a reason. I think that is important to protect consumers, especially those that have limited alternatives and can be taken advantage.

But it’s almost as if affirm is calling out earning interest… taking a risk for a return… when in fact, they do this as well… They better not expand into earning higher rates of interest in the future or I’ll call them out.

But isn’t affirm also kind of in this “predatory” boat? You may not be charging high interest, but you are coaxing consumers into making a big purchase they may not be able to resist.

Quick aside here: people tend to have a lot of issues with Credit Acceptance Corp, a name that makes subprime loans to people needing to buy a car. On one hand, Credit Acceptance makes high interest loans – think a 20% interest rate which seems crazy. On the other, these are predominantly loans to people with FICOs below 550. This is an area of the market that no other lender dares go. And Credit Acceptance usually doesn’t collect on ~25% of these loans, too. So yes, they charge a high rate, but without them – a lot of Americans wouldn’t have cars. In other words, if Credit Acceptance was “regulated away” tomorrow to crack down on high interest loans, would that actually make things better?

I’d like to believe affirm is lending to higher quality borrowers that can afford a $2,000 exercise bike and just want the convenience of deferring the payment.

But if you think about it, Peloton is seeing an uptick in customers using affirm. You could argue Pelton wouldn’t have the same sales without a firm like affirm offering a 0% APR loan for nearly 4 years. Aren’t you essentially admitting you know your price gouging customers?

Off the soap box. I see a lot of issues with this business. No question that its growing and I think it will continue to grow in the near term. But thinking 5-10 years out, and bracketing some of the risks, I’m not so sure its worth it.

It seems to me every tech company wants to insource payments / expand into “fintech”. Do you feel comfortable Shopify and Square aren’t coming for this space? What about when you checkout using Google sign-in or more importantly, Facebook, who is clearly targeting payments?

What is the actual TAM here for affirm specifically? Putting aside the other competitors like Afterpay, Klarna, and Quadpay — Does the number one e-commerce player do this or have they partnered with Visa for their credit card and offer equal payments at 0% APR? Hmmm… Surely they affirm is attacking those sleepy incumbents… Maybe Amazon wants to keep that “merchant revenue” for themselves.