Shopify has had a very profitable start to 2021 thanks to an 8% stake in fintech lender Affirm's IPO.
Jan. 14, 2021
Both Affirm (NASDAQ: AFRM) and Shopify (NYSE: SHOP) have witnessed their businesses grow dramatically in the past year as the pandemic forced retailers to close their physical stores and move processes online. Shopify's stock price rose almost 200% in 2020 and its market cap now surpasses $146 billion. For the fiscal year ended June 2020, Affirm recorded revenue of $509 million, up 92% year-over-year.
Shopify's software allows users to create website storefronts and manage payments easily so they can keep their companies running online. On the other hand, Affirm partners with retailers to offer consumer loans which gives shoppers the option to buy now and pay later in installments. The two digital companies partnered in July and Affirm became the exclusive provider for point-to-sale financing for Shopify's checkout service, Shop Pay.
Affirm's IPO
Affirm had a very successful debut on the Nasdaq exchange on Wednesday which marked the first big tech IPO of the year. The San Francisco-based company initially planned to price its shares around the $33 mark. However, the night before the market debut, the price had reached $49. The higher than expected price range did little to dampen investors' interest in the IPO as the stock ended the day at $97.25, 98% above its offering price.
Affirm stated in its prospectus that its partnership with Shopify allowed it "to significantly expand the number of merchants and consumers on our platform." Shopify is a big player in the e-commerce industry and hosts more than a million businesses on its platform. The partnership helped Affirm's third-quarter gross merchandise volume to increase 50% (YoY) to $30.9 billion. As a result of the deal, Affirm has been exposed to many different companies, which has helped it grow.
However, the merchant diversification that Shopify has offered came at a steep cost -- Affirm granted Shopify the right to buy more than 20 million shares at a penny each. That portion totaled a quarter of shares issued in the original agreement made in July and the remaining 15.2 million were vested with the IPO.
After Affirm's stock market debut yesterday, Shopify's stake is now worth a staggering $2 billion. However, Shopify wasn't the only winner from the IPO as it's only Affirms third-largest shareholder. CEO of Affirm Max Levchin made the biggest gains on the day as his 11% stake in Affirm is now worth $2.7 billion, making him the latest member of the so-called "PayPal mafia" to become a billionaire. Levchin is closely followed by Jasmine Ventures, a wealth fund, who owns 9%.
The growth of the 'Buy Now, Pay Later' sector
Affirm joins a long list of recently successful IPOs, highlighting the growth of the 'buy now, pay later' (BNPL) industry. In December, a Bank of America survey estimated that apps like Affirm and PayPal were set to "grow 10-15 times by 2025 to eventually process between $650 billion and $1 trillion in transactions."
What makes BNPL businesses appealing is the two revenue streams the company typically receives. The first being a kickback of around 2-3% of the price of the goods which is paid by the merchant to the BNPL service. The second comes in the form of interest payments from the borrower.
Partnering with Affirm was a strategic move for Shopify as the e-commerce market, alongside the BNPL industry, is set to continue to grow. Consumers are still shopping online and can be easily tempted to buy an expensive item, like a Peloton bike, which they might not be able to afford right now, meaning the option to pay in installments is very attractive. It's easy to see how this partnership has already flourished.
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