Wall Street hugs Affirm as it starts life as a public company

The 2021 IPO market could reprise 2020's exuberance

And we’re off to the races!

Last night, Affirm priced its IPO above its raised range at $49 per share, a sign that the public markets remain hungry for new listings. Provided that Affirm today trades similarly to how it priced, we could be looking at a 2021 IPO market that resembles last year’s heated results.


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That’s good news for a host of companies looking to follow in the financial technology unicorn’s footsteps.

Poshmark prices tonight and trades tomorrow. With Qualtrics in the wings along with Coinbase, Roblox set to direct list, and Bumble said to file as well, we’re heading into another busy IPO quarter. Affirm’s first-day trading results will therefore hold extra importance, even if its pricing augurs well for IPOs more generally.

Affirm first targeted $33 to $38 per share before raising its range to $41 to $44 per share. Pricing at $49 is a victory. Briefly, why, and then a thought about what’s next for the IPO market.

Affirm

What does Affirm sell? First, per its S-1 filings, it charges merchants a fee to “convert a sale and power a payment.” That sounds like software revenues, albeit not in the recurring manner of a SaaS company.

Second, Affirm earns from “interest income [from] the simple interest loans that we purchase from our originating bank partners.” And, it offers virtual cards to consumers via its app, allowing it to generate interchange revenues.

We care about all of that as it’s important to realize that Affirm is not a software company in the context that we usually think about them, namely software as a service, or SaaS.

This matters when we consider how the market values Affirm; the more richly Affirm is valued in revenue-multiple terms by its new, $49 per-share IPO price, the more bullish we can presume the IPO market is.

What are Affirm’s gross margins? A great question, and one that is surprisingly hard to answer. If you read its final S-1 filing, you’ll find that all its chatter concerning “contribution profit” has been removed. This is a shame to some degree as contribution profit — and margin — were Affirm’s closest shared cognate to gross margin.

But we have the old docs, so let’s read them. Here’s the company in its first S-1 filing:

We define contribution profit as total revenues less [ … ] costs that are closely correlated to and variable with the generation of that revenue.

Contribution profit was stripped out of Affirm’s IPO documents along with other non-GAAP metrics later on. But no matter, we have the old docs and can do our own math.

From that figuring, I can tell you that Affirm’s contribution profit of $79.1 million in its September 2020 quarter was around 45.5% of its revenue for the same period. The 2019 figure from the same quarter was 28.6%. Great progress to be clear, but even its most recent — and improved — number is far below what we would expect to see from a modern software company (SaaS).

Which sounds like we’re being rude, setting up a contrast that Affirm is destined to fail, simply out of spite. But we’re not. Let’s do some math:

  • IPO price: $49/share.
  • Fully diluted valuation, per Renaissance Capital: $14.8 billion.
  • Q3 2020 annualized run rate: $695.9 million.
  • Implied revenue multiple: 21.3x.

You can get a lower multiple with a simple share count, but even then Affirm is worth 17.4x its Q3 2020 run rate. Wow. What this shows is that the market is valuing Affirm like a SaaS company. Which is odd, as Affirm doesn’t have recurring revenues like SaaS companies; it has lower margins than SaaS companies.

This means that investors are hyped for Affirm, and the IPO markets are hot!

So what’s ahead for the IPO calendar more generally? A rush, I’d guess. If Affirm can get that sort of valuation in an IPO, you’d have to be a sucker to raise private capital today if you can access public monies; the latter seem much more willing to get caught up in the hype than late-stage private investors.

Wild.