0% APR Loans And AI Will Redefine Consumer Lending

Key Takeaways

• Expanding 0% APR loans and consumer network aims to boost customer base and transaction volumes, fostering revenue and GMV growth.
  
• AI integration and strategic funding partnerships are expected to enhance operational efficiency and net margins, supporting sustainable earnings growth.
  
• Expansion into 0% loans and international markets poses risks to margins and profitability, while reliance on AI and partnerships introduces scalability and execution challenges.

Catalysts

Operates payment network in the United States, Canada, and internationally.

• Affirm is leaning into 0% APR loans, funded by merchant and manufacturer partnerships, to attract a broader customer base and drive higher transaction volumes without compromising pricing integrity, which is likely to positively impact revenue growth.
  
• The company is expanding its direct-to-consumer network, making compelling offers available across multiple platforms, such as apps and wallets, which should enhance customer engagement and lead to increased GMV and transaction frequency, supporting revenue growth.
  
• Affirm's strategic focus on optimizing RLTC margins by introducing more 0% APR products and carefully managing credit exposure could enhance net margins despite the potentially lower margins on 0% products, leading to sustainable earnings growth.
  
• Continued optimization and integration of AI across the company's operations and credit decision-making processes are expected to improve operational efficiency and potentially reduce costs, which could positively impact net margins and earnings.
  
• The partnership with Sixth Street for a significant funding program is expected to provide a strong financial backing for future growth, ensuring attractive funding costs, which could positively affect net margins and overall earnings as it allows Affirm to scale effectively.

Affirm Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Affirm Holdings's revenue will grow by 26.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.1% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $699.3 million (and earnings per share of $2.0) by about April 2028, up from $-198.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $979 million in earnings, and the most bearish expecting $141 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.0x on those 2028 earnings, up from -65.4x today. This future PE is greater than the current PE for the US Diversified Financial industry at 13.6x.
• Analysts expect the number of shares outstanding to grow by 2.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Affirm Holdings Future Earnings Per Share Growth

Risks

• The noticeable increase in 0% loans, while attracting more customers, may be margin dilutive as these loans offer lower returns than interest-bearing ones, potentially impacting net margins.
  
• Leaning into programs with 0% interest creates pressure on long-term credit loss profiles, which are slightly lower for these loans but could still affect profitability if credit conditions deteriorate, thereby impacting earnings.
  
• The company faces challenges in attempting to expand internationally and compete with established incumbents, particularly in markets like the UK, which could introduce execution risks and affect revenue growth.
  
• The Fourth Street partnership and changes in funding strategies, while beneficial now, introduce risks regarding long-term cost structures and scalability, potentially affecting net margins if market conditions change.
  
• The integration of AI could alter workforce needs and productivity, but if not managed properly, it risks over-relying on technological solutions without clear financial returns, which could impact operating income and margins.

Valuation

• The analysts have a consensus price target of $67.042 for Affirm Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $45.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.6 billion, earnings will come to $699.3 million, and it would be trading on a PE ratio of 42.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $40.65, the analyst price target of $67.04 is 39.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.