Optimist Fund on Affirm Holdings, Inc.
Thesis
Optimist views Affirm's transaction-by-transaction underwriting model as structurally better aligned with consumers than revolving credit because repayment terms are fixed upfront and there are no late fees or compounding interest. The company maintained credit performance within management's target range while gross merchandise value compounded above 35% annually over six years that included a pandemic and a historic rate shock. The fund believes Affirm's longer-duration loan portfolio requires underwriting expertise that is harder for rivals to replicate and enables higher fees. It describes Affirm as the US category leader, the fastest grower and the most profitable operator in its category, while founder Max Levchin retains more than $2 billion of stock. BNPL penetration remains low in US e-commerce and especially brick-and-mortar retail, giving the fund confidence that the industry remains early in its growth cycle. Its five-year valuation case assumes roughly 30% annual GMV growth, operating margins rising from high single digits to above 30%, and a 35x EPS multiple, producing a $310 price target.
“Our five-year price target is $310, roughly 310% upside, a ~33% compounded annual return.”
Key risks
- Affirm has been profitable on a GAAP basis for only eighteen months, which the fund says is too brief for it to be viewed as a blue-chip payments franchise.
- The five-year valuation depends on sustained roughly 30% GMV growth, substantial margin expansion and a 35x EPS multiple.