Authored By Louis Stevens
This is the final installment of this short series entitled Upside Surprises. I believe there are other Upside Surprises that could be considered outside of the handful I've shared with you in this series, because virtually every business I share and discuss with you fits within the first and third LAS foundational investment frameworks.
Read about those frameworks here.
As I noted in the introduction of the last installment, irrespective of whether these companies revise their guidance upward based on the growth of the lines of business on which we've focused, it's still worth considering these lines of business as they will impact these companies for many years, and possibly decades, to come.
With this in mind, let's review two interesting potential upside surprises today.
Affirm's Catalysts
- AFRM guidance upside = Fiscal Year 2025 growth faster than expected due to its newly formed AAPL partnership
While it may not seem like it based on a review of Affirm's stock price, like so many of the companies I share with you (Grab, Sea Ltd., Snowflake, S1, Hims), Affirm just experienced its best 90 days in its company history.
I've provided in-depth coverage of the business within the Equity Research series of LAS, and, because this is a Brief, I won't delve into the nature of the business and its recent "best 90 days ever."
Today, we will focus on one element of the company: its recent Apple Partnership announcement.
Historically, anytime Apple announced its BNPL product, Affirm's stock would sell off 10-20%. This sell off was due to Apple's distribution control, i.e., it acting as a digital wallet and controlling that digital wallet for ~1.5B humans.
The threat to Affirm was that Apple could simply forcibly insert its competing product into this channel and block out Affirm, thereby hampering Affirm's growth rate and potential growth rate.
We've discussed the concept of distribution in the past, and I will probably leverage this discussion today to discuss distribution on a future podcast so look out for that. In short, controlling distribution channels, such as a channel that controls the experience of 1.5B humans' digital financial activities, is immensely valuable.
Were antitrust not a major hindrance for Apple at this point and were lending not such a difficult and unsavory business for a tech conglomerate trading at 35x free cash flow, Apple could relatively easily force a lending product on its customers, creating a multi-hundred million dollar business in the process, as it has done with Apple Music.
But 1) antitrust is a major hindrance for Apple, and 2) lending is a brutal industry, and Apple scaling up a $200B loan book would be a disaster for its shareholders and its long term valuation (recall our discussion on a recent podcast in which I compared the net present value of future cash flows for a utility vs a consumer finance company. It all builds on itself!).
My belief is that, over the last two years, Apple has come to understand these realities, and, as such, it chose to partner with Affirm for its BNPL product in the U.S.
For Affirm, this implies that it now has a new channel for distribution, alongside its other channels such as Amazon, Walmart, Target, Shopify, and 260K+ other merchants, representing over 60% of U.S. ecommerce volume. This level of distribution has contributed to Affirm's 50%+ hypergrowth rate, the fastest of any U.S.-based public FinTech and its healthy credit metrics.
.png)
With this new channel adding to its GMV and revenue growth in its next fiscal year (July 1st, 2024 to June 30th, 2025), Affirm could provide a surprise upward revision to its full year fiscal year 2025 guidance in its next earnings report.
Whether this happens can't be known for sure today; however, as I noted above, this does represent an important element of the thesis broadly so it's worth noting nevertheless.
Meta's Catalyst
- META guidance upside = WhatsApp growth comes in faster than expected with greater 2024 contribution than expected
"Business messaging also continues to grow across our services and I believe will be the next major pillar of our business. There are more than 600 million conversations between people and businesses every day on our platforms. To give you a sense of what this could look like when it's scaled globally, every week now, more than 60% of people on WhatsApp in India message a business app account. Revenue from click to message ads in India has doubled year-over-year.
Now, I think that this is going to be a really big opportunity for our new business AIs that I talked about earlier that we hope will enable any business to easily set up an AI that people can message to help with commerce and support."
-Zuck, CEO, Q3 2023 Earnings Call
While WhatsApp is not a significant business relative to Meta's legacy Facebook and Instagram properties, it has grown at incredible rates lately, and it does act as India's SuperApp, akin to WeChat in China.
As such an important part of communication, business, and financial infrastructure in India, its value could increase rapidly as Meta leans into expanding its portfolio of products on the platform and increasing monetization.
This could certainly create upward revisions to guidance, if only by a billion or a couple billion as it gets off the ground.
Additionally, as we know from our research on Sea Ltd., India, alongside countries in SE Asia, is one of the fastest growing countries on earth, as the chart below depicts.
India's GDP Is Set To Eclipse The GDP Of The U.K. And Grow From There
Therefore, Meta could experience dual growth tailwinds through a focus on monetization of WhatsApp in India and the region's organic development and ascent into the middle class.
We could also extrapolate these same ideas to regions such as Brazil and Latin America broadly.
The question I would ask with respect to Meta's WhatsApp India business is: How much is India's primary SuperApp worth? In a country with $10T of GDP (in the next 10-20 years), how much would its SuperApp be worth? I'd guess, in a vacuum, $100B+ at least.
To close, Affirm's new channel for distribution and Meta's new region for growth represent catalysts that could create upward revisions to these companies' guidance and correspondingly upside surprises for their stock prices.
Disclosures:
L.A. Stevens has rated Meta a "buy."
L.A. Stevens has not rated Affirm.
