Affirm Seeks Bank Charter to Address Funding Risks Amid Lofty Valuation

What happened

Affirm has submitted applications to establish Affirm Bank, an industrial loan company with FDIC insurance, aiming to scale its BNPL operations with more stable funding. This move targets a key vulnerability highlighted in the DeepValue report: heavy reliance on securitizations and warehouse lines, with a Net Debt/EBITDA ratio of 9.13x and thin interest coverage of 0.34x. While Affirm has demonstrated strong growth, turning GAAP-profitable with positive free cash flow, its stock trades at a 204% premium to intrinsic value, around 104x TTM earnings, embedding optimistic assumptions. If approved, the bank could lower funding costs and reduce leverage, potentially easing regulatory and credit risks in a sector with high delinquencies. However, regulatory approval is uncertain, and the high valuation leaves little margin of safety, with ongoing risks from partner concentration and competitive pressures.

Implication

For investors, this initiative could mitigate funding risk, a core concern in the DeepValue report, by providing cheaper, FDIC-insured deposits to support growth. It might enhance financial metrics like interest coverage and reduce dependency on volatile external markets, potentially lowering overall risk. However, the regulatory approval process is lengthy and fraught with uncertainty, including potential setbacks from the FDIC or state authorities. Even if successful, the stock's valuation at over 100x earnings remains excessively high, requiring flawless execution and sustained growth to justify. Therefore, while this is a strategic positive, investors should remain skeptical, as the high price and unresolved credit and regulatory risks maintain a fragile risk/reward profile.

Thesis delta

The bank application introduces a potential offset to funding risk, which was a primary driver of the 'POTENTIAL SELL' rating due to reliance on costly external financing. If approved, it could shift the thesis toward a more neutral stance by improving balance sheet resilience and lowering capital costs. However, until regulatory clarity and tangible benefits materialize, the high valuation and other risks like credit quality and competition keep the investment case vulnerable, reinforcing the need for caution.