Affirm is operating in an Oligopoly
The current competitive environment for BNPL providers can be described as an oligopoly. In terms of worldwide GMV, Klarna reigns supreme (although their US GMV is comparable to the other two), and Affirm is roughly on par with Afterpay.
Current market share by GMV
Klarna: 62%
Afterpay: 19%
Affirm: 17%
Other BNPL providers such as Sezzle and Zip exist, but have been sidelined due to their lack of scale and would reach low single-digits in market share at most.
While Affirm is currently in third place, the partnerships forged by the company with Shopify and Amazon are starting to pay off. In each of the past 5 quarters, Affirm has grown GMV (and revenue) significantly faster than its competitors, pulling away more strongly each quarter.
GMV growth rate in Q1 2024:*
Affirm: 37%
Afterpay: 25%
Klarna: 18%
The e-commerce market in the USA is dominated by two competitors (yet another Oligopoly): Amazon and Shopify. Affirm has tie-ups with both of these, and is the default BNPL provider in the USA on the two websites. Partnerships like these are starting to drive incremental growth to Affirm – they don’t have to spend a ton of money to acquire new customers, as anyone shopping on Shopify or Amazon will inevitably encounter them.
*Apple Pay partnerships confirms their dominance with large merchants
They recently signed an agreement to become the default BNPL provider for Apple Pay. This is significant for three reasons:
- Incremental growth due to Apple’s size
Mizuho estimated that Apple Pay represents approximately USD 265 billion in US payment volumes, of which Affirm might capture USD 12 billion in GMV. At their current ratios, this would mean approximately USD 1 billion in incremental revenue for Affirm.
- Confirmation of Affirm’s track record
Even more importantly, it is yet another sign of a huge, customer-obsessed company signing with Affirm. These companies are placing a lot of trust in the fact that Affirm can provide a smooth customer experience, and it seems they have not let anyone down so far.
- Makes competition less likely
Affirm stock took a hit about a year ago when Apple first announced they would get into the BNPL business. Their fast withdrawal now signals not only that Affirm is a reliable provider for large companies, but also that the business has significant barriers to entry that even a huge company like Apple was not willing to attack.
Now that Affirm is offered at Amazon and Shopify, it is quite unlikely for these companies to adopt a second default BNPL option. In fact, Affirm had an exclusivity arrangement with Amazon that expired in January 2023, but the company has yet to add another BNPL provider. Why should they? As long as Affirm is able to fulfill all requests by customers who ask for BNPL, there is no need to complicate things with an additional provider.
Conclusion
Affirm is a bit of a controversial stock with varying price targets. Based on their financial track record and management, I am confident that they have set the right levers for continued growth in the coming years. On a 5-10 year timescale, I am very confident that Affirm will significantly outperform the overall e-commerce growth, as well as all its BNPL competitors.
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