Lawyers for Affirm, an online consumer finance company, filed a S-1 registration last week, which is a precursor for a public share offering. It’s the latest step toward building a payment platform to connect brands and merchants to consumers.
Shopify Inc. (NYSE: SHOP), an Ottawa, Canada-based e-commerce platform is critical to that success.
Affirm partnered with Shopify in July to power Shop Pay Instalments. The idea is that online consumers will make purchases throughout the Shopify system and pay later with installments. A corporate press release said payments would be split into four equal, biweekly interest-free charges.
On paper, that seems like a deal for Shopify, its merchants and their customers. The Affirm financing is an interest-free alternative to credit cards and traditional bank financing.
In reality, it looks like Affirm needed the deal more than Shopify.
The S-1 reveals that Affirm managers granted Shopify an option to buy 20.29 million shares at a penny apiece, despite the San Francisco-based firm not yet being a publicly-traded company. Those shares represent 5% of the business.
Given that Affirm is expected to fetch a valuation in the $10 billion range, according to a report in the Wall Street Journal, this means Affirm managers paid Shopify perhaps $500 million to be the exclusive provider of installment payment services on Shop Pay.
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It’s not hard to understand why Affirm would take this step.
At the time, Shopify CEO Max Levchin called his company the gold standard in e-ecommerce platforms. Despite its Canadian headquarters, the company built a dependable global platform that helped more than a million brands and smaller mom-and-pop shops effortlessly move their storefronts online.
A month before the Affirm deal, Shopify signed an agreement with Walmart Inc. (NYSE: WMT) to open up Walmart Marketplace to those sellers. And in May, the company announced the platform would play an integral role in Facebook, Inc (Nasdaq: FB) Shop, a new e-commerce initiative to help Instagram and Facebook members build shops and begin taking online orders.
Store building and logistics is a valuable skillset mostly restricted to Amazon.com, Inc. (Nasdaq: AMZN) and the larger Chinese internet retailers like Alibaba Group Holding Ltd. (NYSE: BABA). Very few independent businesses have managed to crack the code. And none of them have the scale Shopify architects have achieved.
The global pandemic and employment trends make this even more sought after.
eMarketer, a data analytics researcher, forecasts that the global market for e-commerce sales is expected to reach almost $5 trillion by 2021, up 17.1% vs. 2020. More important, the firm notes that number should be 18% of total retail sales, the highest ever.
It’s a trend that Levchin knows well. The serial entrepreneur was part of the group who founded PayPal Holdings, Inc. (Nasdaq: PYPL), one of the first online alternative payment success stories. He understands the secret to building a big, important digital platform is a first mover advantage. Paying up to attach Affirm to Shopify’s growth is a good move.
Affirm logged $510 million in sales during fiscal 2019, up 93% year-over-year. Unfortunately, the company served only 6,500 merchants. Many of these, like Peloton Interactive, Inc. (Nasdaq: PTON) and Expedia Group, Inc. (Nasdaq: EXPE), have the wherewithal to ultimately move on to self-financing options.
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The relationship with Shopify should have more sticking power. Giving a partner equity tends to have that effect.
I have been a fan of Shopify since 2017, when shares traded at $57. The company is a logical e-commerce platform winner because its core business is focused on the buildout and equipping of new stores. Ultimately, every store is going to need digital presence. Shopify makes the tools required to maintain those storefronts.
The company noted in July that second-quarter merchant-solution sales grew to $518 million, up 148% year-over-year.
At a price of $998.50, Shopify shares are up 150% in 2020. The stock trades at 280 times forward earnings and 48 times sales … and it’s still cheap because the potential is so great.
Aggressive growth investors should buy any material decline in the near term.
Best wishes,
Jon D. Markman
