What's up guys and welcome back to wall street millennial on this channel, we cover everything related to socks and investing today we're looking at the fintech company affirm, which was one of the hottest ipos of 2021 and also ended up being one of the biggest bubbles to Say that wall street was enthusiastic about a firm would be an understatement. They raised 1.2 billion at a valuation of 49 per share. When shares started trading, they immediately skyrocketed, almost doubling in value to 91 dollars. Unfortunately, the company has failed to live up to the hype.

Thus far, the share price lost almost two-thirds of its value since the ipo bounce and its current price of 42 dollars, a share is even less than the 49 offering price in this video we'll look at what a firm does why there was so much hype around The ipo and why they failed to live up to expectations founded by former paypal co-founder max lovgen. A firm is a leader in the so-called buy now pay later space. They provide installment loans where you can buy a product today and pay for it with monthly payments. Over the course of 3, 6 or even 43 months, it's basically a way for people to live beyond their means.

If there's an expensive item you want to buy, but you can't afford it, you could use a firm to push back the payments until your next paycheck, for example. Let's say you want to buy peloton's 3 000 treadmill, but you don't have three thousand dollars of cash sitting around. You could instead purchase it on credit through a firm with zero dollars down. If you choose a 43 month option, you only have to pay 76 dollars per month for the next three and a half years with zero interest, but if they don't charge interest, how do they make money? A traditional bank makes money from interest on their loans.

Let's say you buy a three hundred thousand dollar house on a thirty year mortgage by the end of the thirty years, you will have ended up paying a lot more than three hundred thousand dollars to the bank. This chart shows how much interest and principle you will pay off over the 30 years over the course of the mortgage. You will pay 276 000 worth of interest, which is almost as much as the home's value. Even when the interest rate is relatively low, it adds up over time in the case of a firm's peloton, offering they don't charge any interest.

Peloton pays a fee to a firm equal to a percentage of sales that use a firm financing. The fees from the merchant compensate a firm for bearing the credit risk, as well as their cost of capital pelton, is effectively subsidizing their customers by paying the interest rate for them. This is an effort to boost sales of their products. In some cases, the merchant does not subsidize the interest rate.

In these cases, a firm will charge you an interest rate between zero and thirty percent, depending on the size of the purchase, your credit score and other factors. The average interest rate is about twenty percent. Americans are notorious for spending excessively on frivolous consumption. The us has one of the highest household debt to gdp ratios in the world.

Second, only to hong kong, any product that makes it easier to borrow money and make purchases beyond your means should have a lot of demand in the u.s. Investors viewed a firm as an innovative and disruptive financial technology company, and that's why they send the share price. Doubling on the ipo day, but if you want to buy something that you can't afford a firm, isn't the only option you can also pay for it with a credit card and pay off the bill whenever you want down the line. The average credit card interest rate in the us is 20.5, which is almost exactly the same as the rate that a firm charges on the surface.

It doesn't look like a firm. Is that innovative or disruptive? It's basically just an online credit card which offers very similar economics to the end customer. Despite this, a firm has been able to grow impressively in recent years. Pre-Pandemic they processed about 1.3 billion dollars of gross merchandise, value or gmv per quarter.

Gmv is a value of goods for which they finance the purchase of by the fourth calendar quarter of 2021. This had more than tripled to 4.4 billion dollars. That's an insane amount of growth and far beyond the growth of the credit card industry in the same period. So what differentiates a firm traditional credit card lenders rely heavily on the fico score.

The fico score is calculated by credit reporting agencies to determine the credit worthiness of consumers. Your fico score depends heavily on your previous credit history. For example, if you had a home mortgage or auto loan in the past that you've defaulted on, your fico score will be very low. If your fico score is too low, banks will view you as a risky borrower and deny your credit card application.

Even if you've never defaulted on a loan, you may still have a low fico score if you're young and you may have little or no credit history. This will give you a low or possibly no fico score at all. This can put you in a catch-22: you need to have some loan history to have a fico score, but without a fico score you can't get a loan. In the first place, a firm uses a more holistic approach to assess credit risk, which they claim allows them to approve 20 more applicants compared to the traditional credit card companies.

They use artificial intelligence to assess how likely someone is to repay their loan. Looking beyond. Just the fico score, one example of this is looking at the type of product the consumer is trying to buy. For example, if a consumer who has never borrowed money before is trying to get financing on a 50 000 rolex, there's a high probability that they're planning to resell it on the secondary market and default on the loan.

On the other hand, if the consumer is trying to buy a 2 000 purple mattress, it's very unlikely that they plan to resell it. They probably just want to use it for themselves and will honestly pay back the loan, while a traditional credit card company might reject both of them. If they had limited credit history, a firm could approve the mattress buyer. Thus, a key benefit of a firm is that they can give credit to consumers who would otherwise not have access to it.

Also, unlike credit cards, they do not include late fees or other gimmicks in the fine print. This helps a firm, build trust with consumers that all sounds great, but if a firm is really an innovative fintech company with a superior value proposition, why has the stock declined by more than 60 since the ipo wiping out 20 billion dollars of shareholder value in the Process, it boils down to two main reasons. Firstly, the company was obscenely overvalued and, secondly, they carry a tremendous amount of risk on their balance sheet. Since the beginning of the pandemic, a firm's revenue has increased by 160 percent, which is very impressive.

However, their net losses have also exploded in the most recent quarter. They lost 143 million off revenue of 361 million. That's a net profit margin of negative 44, which is pretty bad by almost any standard, as it turns out they're feeling their revenue growth by spending massively on sales and marketing during the same period, their sales and marketing budget has increased 20-fold, even as their revenue increased. The sales and marketing as a percentage has still increased to more than 40 percent in the most recent quarter.

This begs the question is a firm growing because their product is really that good or is it growing because they're rapidly burning their ipo proceeds to hire an army of salespeople to sign on new merchants in the months following the ipo investors started looking at these widening Quarterly losses and the stocks started gradually moving downwards, but it looked like they were saved in august of 2021 when they announced an exclusive partnership with amazon. Under the deal, amazon customers will have the ability to use a firm financing on products which cost over 50. Amazon is the largest us ecommerce platform by far with over 600 million dollars of gross merchandise value. This massively expanded the firm's ability to acquire new customers, but even with the amazon partnership, the company was probably still overvalued at the peak share price of 164 dollars per share.

A firm had a market cap of roughly 45 billion dollars for the fiscal year of 2022. Most of which includes the benefit from amazon. They expect to make 1.3 billion dollars of revenue. This put their valuation at about 35 times, revenue and they're still expecting to lose money for comparison, discover which is one of the largest us credit card companies trades at a forward price to earnings multiple of 11 times, which is a large discount to the s.

P. 500, on a price to sales basis, its market cap is about three times its sales or less than one tenth of a firm's peak. Multiple banks and credit card companies generally trade at a discount to the broader stock market, because they're considered to be very risky and economically sensitive during recessions, many people lose their jobs and default on their loans. For example, during the 2008 financial crisis, the percentage of credit cards in default increased from four percent to almost seven percent.

While that doesn't sound like a lot, a lot of credit card companies are highly leveraged. Even a small percentage point increase in defaults could lead to insolvency. At least at the peak. The stock market seemed to think that a firm was much less risky than traditional banks and rewarded them with a premium valuation of 35 times revenue, but is a firm really safer than traditional banks.

A firm currently holds about 2.3 billion dollars worth of consumer loans. On its balance sheet to fund these loans, they've borrowed about 1.6 billion dollars of commercial financing. This chart shows the delinquency ratio of a firm's loans. Delinquency means that the borrower is at least 30 days late on a payment.

Their delinquency rate fluctuates from year to year. Generally falling within the range of 0.8 and 3, this red line shows discover's average delinquency ratio. In 2020., a firm's delinquency ratio appears to be roughly in line with discovers. So, despite a firm's advanced, artificial intelligence, algorithms to assess credit risk, their loan portfolio seems to be pretty similar to traditional credit card companies.

A firm was founded in 2012, so we don't know how they would fare in a financial crisis. The only recession they've experienced is the 2020 coveted recession which was short-lived defaults did not rise drastically because of the government's unprecedented stimulus programs. At the end of the day, a firm isn't all that different from a regular credit card company like discover they lend money to consumers at about 20 interest rate. They hold these loans on their balance sheet and in the event of a deep recession, their loan loss provisions will skyrocket.

The only difference is that a firm is a digital first platform and they are spending hundreds of millions of dollars on sales and marketing to boost their revenue growth. A firm is likely years away from ever turning a net profit or paying a dividend when they ipo'd in early 2021, the fed was still pumping money into the economy, and the growth stock bubble was inflating. Now the fed is about to start raising interest rates. This puts pressure on all money, losing growth stocks and a firm is no exception.

Alright, guys that wraps it up for this video. What do you think about a firm? Are they really an innovative fintech company or just a credit card company in a slightly different form? Let us know in the comments section below as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.