In 2020, the electronic payment sector will become a favorite of Wall Street. Entering 2021, another player has entered the electronic payment track.
According to news on January 7, the US mobile payment company Affirm recently updated its prospectus and is preparing to list on NASDAQ in the near future. Affirm is issued in the range of US$34 to US$38, with an estimated valuation of US$12 billion.
Affirm was founded in 2012 and is headquartered in San Francisco, USA. It is a financial services company that focuses on "prepayment" and is known as the US version of "Huabe".
The electronic payment track is a piece of sweet pastry, not only the pioneers of vertical giants such as PayPal and Square, but also the full-ecological giant players such as Apple. As a new entrant, what differentiated advantages does Affirm have compared with its predecessors? How far can Affirm go on this fiercely competitive track?
Affirm and ants are like brothers but not brothers
When Affirm was founded, the goal was to completely change the traditional banking industry. Its founders believed that Wall Street bankers were sticking to an unreliable attitude, and the entire banking industry became more rigid. In the eight years since its establishment, Affirm has completed seven rounds of financing.
Has developed to the present, has Affirm achieved its original "ambition"? Through its prospectus, its financial data may be a good test indicator.
According to the prospectus data submitted by Affirm to the SEC, in the first half of 2019, Affirm's net income was US$264 million, and by the first half of 2020, its net income was US$510 million, a year-on-year increase of 93.18%.
From the third quarter year-on-year data, Affirm's net income rose even higher. Net income in the third quarter of 2020 was US$174 million, compared with US$87.947 million in the third quarter of 2019, a year-on-year increase of 97.73%.
Analyzing the growth of Affirm's revenue, we need to return to the business level. From the data disclosed in the prospectus, it can be seen that Affirm has five major business lines, of which the most important sources of income are two-merchant network income and interest income.
Judging from the revenue data for 2019 and 2020, merchant network revenue accounts for about half of total revenue, and interest income accounts for about 36% of total revenue.
The essence of the merchant network revenue is that Affirm charges a certain percentage of the handling fee from the transaction between the merchant and the consumer, and this fee is borne by the merchant. According to the US Stock Research Agency, Affirm’s cooperative businesses include well-known brands such as IKEA, Wal-Mart, and Adidas. The number of cooperative businesses exceeds 4000, and the number is still rising.
In addition to the certain competitiveness behind Affirm's revenue growth in 2020, it is also an important reason for merchants to shift to online payments due to the impact of the epidemic. Under the influence of the epidemic, the real economy of the United States was greatly affected, but the online economy unexpectedly ushered in an outbreak period. Both consumers and merchants are actively migrating to online consumption and online services, and the explosion of e-commerce payments has also driven the growth of online business of merchants that Affirm cooperates with.
Speaking of the handling fees in Affirm's revenue, perhaps investors who have a little understanding of electronic payments will come to the minds of Ant Group's Alipay. In the initial stage of development, it mainly relied on charging merchants to make a living. As the business continues to deepen and expand, Ant Group's dependence on handling fees is also decreasing.
According to the data disclosed in the prospectus, the proportion of Ant Group's digital payment and merchant service business revenue has fallen from more than half of 2017 to 36% in the first half of 2020; conversely, the proportion of digital financial technology platform revenue has increased from 44% in 2017. Increased to 63% in the first half of 2020.
It can be seen that the business structure of Affirm and Ant Group is different, and the main source of revenue between the two has achieved a certain degree of "upside-down".
According to the US Stock Research Agency, part of the reason for this situation is that the profit margin of financial lending business is considerable. According to statistics, the gross profit margin of digital financial services exceeds 50%, and the net profit margin is close to 20%, which is much larger than that of merchant formalities services.
Under the influence of interest, why didn't Affirm focus its development on the financial lending business? The US Stock Research Agency believes that this may be due to the differences in the financial payment markets of the two countries.
American traditional financial institutions (investment and financial management, insurance, etc.) are more mature than the domestic market. When users need capital turnover, a wide range of traditional financial loans can meet the needs of most people, so the number and proportion of users who borrow funds from Affirm is still small. This is still slightly different from the current domestic situation.
Although the "blood loss" is reduced, breaking through the profit bottleneck is the key
Although business service income and interest income have achieved relatively good increases, at least from the current situation, it has not yet helped Affirm to achieve profitability.
According to the data disclosed in the prospectus, the net loss in the first half of 2019 was US$120 million, and the net loss in the first half of 2020 was US$113 million. Judging from the year-on-year situation in the third quarter, a loss of US$30.8 million in the first half of 2019 and a net loss of US$15.28 million in the first half of 2020.
(Source: Prospectus)
Although it is still at a loss, but fortunately, the amount of Affirm's loss is constantly narrowing. Whether this narrowing trend can continue in the future will be one of the key factors affecting investor sentiment and Affirm's post-IPO market valuation.
According to the US Stock Research Agency, one of the factors that affect Affirm's profit is cost, and cost control is actually a double-edged sword. One way to increase profit margins is to shrink costs, but to achieve business development and expansion, cost input is indispensable.
(Source: Prospectus)
From the prospectus data, from the third quarter of 2019 to the third quarter of 2020, the growth of Affirm's total operating expenses is very significant. The total operating expenses in the third quarter of 2019 were US$121 million, and in the third quarter of 2020, it rose to US$219 million, an increase of more than US$100 million.
Among the various cost expenditures, the largest increase was in sales and marketing. At this stage, it may be understandable that Affirm's investment in this part is too large. In 2019, Affirm's transaction sales accounted for only 1% of the total US e-commerce. In order to attract users, the cost of obtaining users is high, especially in the context of increasing monopoly in the electronic payment field.
PayPal has 346 million active accounts in the second quarter of 2020, and 364 million monthly active users. On the other hand, Affirm can see from the data shown in the prospectus that there is a big gap between it and PayPal.
(Source: Prospectus)
In addition, loan commitment losses also account for a relatively large cost expenditure, and for electronic payment platforms involving credit business, this part of the cost expenditure is essential, and the key lies in how to use technical means to reduce losses as much as possible .
Affirm provides young people with a way to consume ahead of time. With the continuous enhancement of consumption power in the "Z era", it also provides a good development opportunity for the electronic payment platform represented by Affirm. The seizure of young users is a crucial task for Affirm, which does not have a high market share. Therefore, how to improve profitability while controlling operating costs will be a challenge for Affirm in the future.
US electronic payment is ushering in an explosive period, and the competition will be "blood flowed into rivers" like the competition under the forest?
Earlier, Bloomberg released the 2021 outlook for the US financial technology and payment industry, saying that these stocks will benefit greatly. The bank predicts that Square (SQ.N) is valued at 178 times EPS in 2021, a 76% premium over the historical average of the two-year period, and StoneCo (STNE.O) is 71 times, a 75% premium, thanks to the strong The stock price increases and the EPS forecast for 2021 is lowered. Paypal (PYPL.O) (PYPL.O) has a smaller expansion of its P/E ratio at 36%, reaching 48 times
From the perspective of the overall electronic payment industry in the United States, electronic payment platforms headed by Square, PayPal, and StoneCo will be on the cusp of the storm in 2020. The IPO of Affirm may further promote the level of competition on the track.
In the past 2020, the share prices of several major electronic payment platforms in the United States have achieved good results. PayPal's stock price rose by 112%, and Square's stock price rose by 247%, far ahead of the market's gains.
Among them, PayPal is undoubtedly the leader. As of the publication of the US Stock Research Agency, the market value of PayPal has reached $280 billion. In the third quarter, PayPal's total revenue was 5.46 billion U.S. dollars, a year-on-year increase of 25% compared with 4.38 billion U.S. dollars in the same period last year; compared with 5.26 billion U.S. dollars in the previous quarter, an increase of 3.8%.
Behind the high stock prices of these platforms is the global electronic payment industry, which is still expanding in scale and volume. According to research, by 2025, the global digital payment market is expected to grow at an annual rate of 24%, reaching US$12.4 trillion. The overall growth of the industry provides the lowest level guarantee for the development of these platform players.
In addition to the overall industry expansion, the US Stock Research Agency believes that antitrust investigations also provide a good opportunity for the development of these electronic payment platforms.
In FAANG, Apple has its own electronic payment ecosystem, Apple pay. It has also launched a joint electronic credit card with Goldman Sachs before. Apple has the ambition to do payment business, and more importantly, it also has its strong strength. This is a strong threat to small and medium players like Affirm.
However, the antitrust investigation has inhibited the expansion of Apple pay at least to some extent, and this may be a boon for PayPal, Square and the upcoming Affirm.
It is worth noting that in the list of shareholders of Affirm, Shopify holds 8.6% of the shares. As an e-commerce platform, Shopify's investment in electronic payment platform Affirm is not unclear. The combination of "electronic payment + e-commerce" can form a closed business loop and maximize profits.
In February 2020, Affirm CEO Max Levchin, who is also one of the founders of PayPal, said in an interview with CNBC that the rise of digital currency will further replace cash transactions, and digital payments will also be further developed. This is a trend worth looking forward to.
Affirm came to the New York Stock Exchange with digital payment, but in the market competition pattern with jackals before and tigers and leopards, more important than listing is how to gain a firm foothold, especially when the market share is only 1 % Under the severe background. For the follow-up progress of Affirm, the US Stock Research Agency will also continue to pay attention.
Source of the article: American Stock Research Institute, please indicate the copyright for reprinting