Affirm holdings (NASDAQ:AFRM) went public on Jan.15 and raised over $ 1.3 billion before spending. One glance at its prospectus and you won’t be impressed, especially since AFRM stock has a huge premium over its IPO price.

Affirm is a millennium focused lender in the installment and late payment loan business. Affirm engages online merchants to accept its lending capacity in order to enable these merchants to help people purchase their products.

These late payment loans are basically installment purchases by the buyer or the spender. The merchant ships the products and is paid by Affirm for the product. In addition, Affirm deals with the buyer who takes out a specific loan for the purchase. Affirm charges a fee from the merchant for the sale and also makes interest on the late payment loan.

AFRM stock has skyrocketed from its IPO price of $ 49 on day one. At one point, the share was above $ 129 per share. It is now at $ 118, with a market cap of $ 28.6 billion.

The problem is, the business is losing money and there is every chance it will continue to do so.

Losing money on every loan

The problem I discovered while looking at the financial data is that Affirm is losing a lot of money. Also, the company doesn’t talk much about its very high loan loss rate.

Here are the basics. Affirm lost $ 112.6 million in its 2020 fiscal year ending June 30 on revenue of $ 509.5 million. The company had $ 1.034 billion in loans outstanding as of June 30 and $ 1.4 billion as of September 30. On average last year, it had $ 884 million in loans outstanding, but it made $ 105 million in loan loss provisions.

Therefore, if we divide $ 105 million of loan losses by average loans of $ 884 million outstanding, its loan losses were 11.86% of loans. This is an astronomically high rate.

Here’s why it matters. Considering all the fees Affird has to pay to borrow the money it lends and the rate it can charge its clients, it is not clear that this can ever pay off.

For example, say Affirm borrows at 2% above the London Interbank Offered Rate (Libor) and lends money at 15% on average (especially after taking into account the fact that it repays its loans by anticipation). This leaves only 13% potential profit. But 11.86% or almost 12% of that amount is absorbed by loan losses. This leaves no room for administrative costs.

Even though it may bring a profit, the margin will be very slim. Affirm does not indicate what its net interest margin is. It also doesn’t show how its business model will ever make money.

So, I am not impressed with the economics of the business.

What to do with AFRM actions

In fact, I spent a lot of time trying to find answers to basic questions while going through the flyer. For example, I couldn’t see how many merchant customers he currently has. Or how many loan clients does it have? What is the average interest rate on their loan? This is especially important since many of its loans are made on a zero percent interest basis, as long as the customer pays on time over 12 months.

There were a lot of graphics, some extremely complicated. But nothing about his basic metrics, and especially about how he’s going to make money.

And that brings up one of the main differences with SPAC (Special Purpose Acquisition Company) agreements. In their presentations, the PSPC merger agreements provide for many years in the future the company’s own internal forecasts. In addition, they also often compare their valuation to that of their peers.

There is none of this in the Affirm flyer. I’m sure Affirm thinks they will make some money in the future. But I don’t see how Affirm is going to overcome its insanely high loan loss allowance rate.

Therefore, I suspect that most investors will want to stay away from AFRM stocks until they move lower from their overvalued levels today. At some point, the business will be profitable or have the prospect of profit.

At the moment, I don’t see it. Wait for that to happen.

As of the publication date, Mark R. Hake does not hold a long or short position (directly or indirectly) in any of the stocks in this article.

Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.