Affirm Kisses the Godfather’s (Amazon’s) Ring
Fintech media darling Affirm released Q1 2022 earnings November 10, much to the delight of its shareholders. Year over year operating and financial highlights included:
Gross merchandise volume (GMV) of $2.7 billion, up 84%, (138% excluding Peloton, Affirm’s largest merchant)
Active merchants increased from 6,500 to 102,000
Active consumers increased 124% to 8.7 million
Top line revenue increased 55% to $269.4 million
By almost every measure, it was a solid beat. Affirm also delivered very positive guidance. CEO, Max Levchin put it this way, “the seeds we planted years ago are just beginning to bear fruit. The growth of our network is accelerating and my confidence in Affirm’s market position has never been stronger.” But, the biggest news item, and the one (arguably) most responsible for Affirm’s gap-up open the next day (24%), was an expansion of its relationship with Amazon.
The original Amazon / Affirm relationship was announced in August. Though light on specifics, the new partnership was described as providing a way for “select” Amazon customers to use Affirm’s buy-now-pay-later (BNPL) option at checkout for purchases of $50 or more. On paper, the new partnership made sense. It dovetailed nicely into Affirm’s mantra of giving consumers greater choice in payment options, and Affirm’s assertion to its merchant partners that its BNPL alternative will lead to increased sales. However, no reporting at the time suggested the new partnership would be permanent or exclusive.
Thus, the newly “expanded relationship”, giving Affirm exclusivity as Amazon’s only embedded BNPL provider through January 31, 2025, became a real needle-mover for the stock. Affirm gained exclusivity and semi-permanence through January 2025.
But why such bullish sentiment for Affirm when only a few days prior, Paypal released earnings and announced that it too had reached a deal with Amazon to allow its consumers – 80 million of them – to use their Venmo accounts to make purchases starting in 2022? Granted, Paypal’s CEO, Dan Schulman didn’t issue equally positive guidance (guided down in fact) when compared with Max Levchin’s, but still, shouldn’t both of these fintechs’ partnerships with behemoth ecommerce platform Amazon engender positive stock sentiment?
Not necessarily, and here’s why.
Paypal went to Amazon with 80,000,000 Venmo users. By any measure this is a massive user base. So much so that it probably earned Paypal a legitimate seat at the negotiating table, with each party holding something of value to the other. However, Affirm’s user base is roughly 1/10th the size of Paypal’s. Therefore, it’s fair to say that Affirm ‘needed’ Amazon more than Amazon needed it, and as such, lacked the negotiating leverage to earn them a seat at the negotiating table – at least a seat on commensurate footing. So, what did Affirm do?
It bought a seat.
At the same time that Affirm released earnings, it also released an 8-K detailing the terms of the new “Material Definitive Agreement” with Amazon. The gist of the arrangement – how Affirm ‘bought’ its seat at the negotiating table – boils down to it issuing Amazon multiple tranches of in-the-money (ITM) warrants for Affirm’s Class A common stock for the duration of the original term of the commercial agreement. The breakdown is as follows:
- First Warrant:
- Affirm issues Amazon 1,000,000 ‘First Warrant’ shares for Class A common stock at $0.01 strike upon the signing of the new agreement
- Affirm issues Amazon an additional 6,000,000 ‘First Warrant’ shares for Class A common stock through the initial term, that vests quarterly. The warrants are dependent on certain obligations of Amazon to “ensure the display and availability of Affirm’s installment payments product at checkout, and parity of program-terms with any other non-card payment installment providers”.
- Second Warrant:
- Affirm issues Amazon an additional 15,000,000 ‘Second Warrant’ shares for Class A common stock at $100 strike upon certain performance targets tied to unique users – users using Affirm products for the first time. They also vest quarterly.
At this writing (Friday, November 18th), Affirm (NASDAQ: AFRM) is trading at $136 per share. Without doing the exact calculations, the math tells us that in exchange for Affirm’s exclusivity with Amazon, it coughed-up 22,000,000 deep in-the-money warrants. That’s a legit kissing of the ring – full Godfather style – by any standard and ought to be considered when evaluating Affirm as an investment.
SaaS | Fintech investment bank take…
That Amazon made Affirm kiss its ring isn’t unusual …for Amazon at least.
In what I think is a fantastic article from The Wall Street Journal this past June, written by Dana Mattioli ( Twitter @DanaMattioli ), she reports in great detail on how Amazon has crafted similar commercial contracts with other service providers. The ‘equity for access’ deal isn’t new. According to her reporting, it’s a structure Amazon has embraced and deployed in over 75 instances with private companies. Amazon leverages its “market heft to increase its wealth and clout”, capturing upside in its service providers’ success, as a function of allowing them access to Amazon’s platform. However, what’s not clear from her reporting is whether this deal structure is just another way to give shareholders greater return on investment, or more strategic, in the sense that the deal structure may be a way for Amazon to position itself to acquire these service providers at a later date (optionality).
I would go so far as to say that in the case of Affirm, this appears to be what Amazon did. Affirm has 208,200,000 shares outstanding and is floating 167,550,000 shares. Amazon has warrants, in aggregate, for 22,000,000 shares. The warrants alone give Amazon more than 10% of the float, and close to 10% of shares outstanding. Normally, we’d think this was a play to make Amazon an ‘insider’, and it could be inferred that Amazon may at some point want to acquire Affirm outright.
Affirm has two classes of stock. The warrants that Amazon received are for Affirm’s Class A shares that carry voting rights of one vote per share. Affirm did not give Amazon warrants for its Class B shares which carry voting rights of 15 votes per share. And because ‘insider’ status is a function of 10% of voting rights (not of shares outstanding), even upon full exercise, Amazon is not going to be a company insider on this deal.
Further, there’s another interesting condition of the warrants issued to Amazon. Also per Affirm’s 8-K, there’s a “Beneficial Ownership Limitation” clause that states that at no single time, upon exercise of its warrants, may Amazon own more than 4.999% of the outstanding Class A common shares. Affirm is being explicit here in limiting Amazon’s influence on the company beyond that agreed to in the commercial agreement.
So, what’s the bottom line?
Did Affirm kiss the Godfather’s (Amazon’s) ring?
Affirm’s new expanded deal with Amazon was bought and paid for with extremely valuable – more economically than strategically– deep in-the-money warrants which will accrue to the benefit of Amazon shareholders. But it also looks like Affirm made sure to limit the ability of Amazon to influence it by taking away ‘active investor’ and/or insider status.
It’s still possible that Amazon may make an acquisition play for Affirm in the future, but for now, this newly expanded agreement between the up-and-coming fintech and the ecommerce giant looks more like a partnership. Because of this, investors who may have piled into Affirm’s stock after the earnings announcement, primarily because they thought it was a signal that Amazon might acquire Affirm, may want to rethink their thesis.
One last thought.
I find the structure of this commercial agreement to be extremely creative and thoughtful. To think that it was likely structured between both companies’ corporate development teams, and not investment bankers, says a lot about the quality of personnel that Amazon and Affirm have access to.
As a fintech investment banker, I’ve taken note.