The Dark Side of Affirm’s Bright Quarter

Affirm Holdings’ latest quarterly report shows revenue soaring 33% to $1.17 billion and gross merchandise volume climbing 36% to $14.1 billion. However, a closer look reveals a more complex narrative – one that highlights the precarious balance between consumer spending power and rising inflation.

On its face, Affirm’s numbers appear impressive. The company has posted eleven consecutive quarters of GMV growth above 30%, with active consumers growing by 21% to 27.8 million. New president Michael Linford is undoubtedly optimistic about the future, calling it a “new market” that Shopify has helped pull Affirm into. Susquehanna’s James Friedman has even raised his price target to $110 from $105.

But amidst all this positivity, CEO Max Levchin dropped a bombshell – one that should give investors pause. Gas prices are increasingly squeezing consumers, forcing them to turn to services like Affirm to manage costs across multiple fronts. As of August 28, the national average gas price sat at $4.09 a gallon, down from its peak in May but still significantly higher than pre-Iran war levels.

Levchin’s caution is understandable. While short-term growth may be sustained by consumers’ willingness to take on debt, there are warning signs that this trend won’t continue indefinitely. As gas prices remain high, consumers will face increasingly difficult choices between filling up their cars and paying their bills. This tension is particularly acute for low- and middle-income households, who have been disproportionately affected by rising fuel costs.

The Affirm Card’s rapid growth – with active user counts more than doubling to 5.2 million – may seem like a silver lining. However, it also highlights the company’s dependence on consumers taking on debt to cope with inflationary pressures. This is a precarious strategy at best, one that risks creating a vicious cycle of debt accumulation and financial strain.

As the market weighs Affirm’s impressive quarterly numbers against the looming threat of sustained gas price pressure, investors should remember the long-term implications of this trend. While short-term growth may be fueled by consumers’ willingness to take on debt, a sustained rise in gas prices will eventually bite back.

Compass Point’s Giuliano Bologna has noted Affirm’s “resilient credit performance,” but this is precisely the issue – resilience only goes so far when faced with an economic downturn. As Levchin himself admitted, sustained pressure on prices isn’t great for business in the long term.

In the coming months and years, a more nuanced picture of Affirm’s financials will emerge. Will the company continue to grow its GMV at breakneck speeds, or will rising gas prices begin to take their toll? One thing is certain – investors would do well to keep a close eye on the national average gas price, for it holds the key to unlocking Affirm’s future success.

Ultimately, Affirm’s success is tied to the health of the broader economy. When consumers are struggling to make ends meet, services like Affirm can provide a temporary lifeline – but only until reality sets in and the music stops.