Affirm Holdings

Affirm reported strong results in the fourth quarter of its 2026 fiscal year, driven by robust gross merchandise volume growth and distinguished by expanding operating margins. Revenue increased 33% to $1.17 billion from a year ago, while operating income grew 153% to $147 million.

Why it matters: Affirm's shares traded up by a high-single digit percentage following the earnings release, likely reflecting steadily improving operating margins, which led to a 45% adjusted EPS beat relative to FactSet consensus estimates, and the continued momentum of the company, with over 30% volume growth compared with the prior year. Revenue per dollar of gross merchandise value compressed to 8.3%, down 20 basis points from a year ago. That's driven by a mix shift toward lower fee loans, but 20% growth in per-customer transaction frequency outweighed the mix headwind. Although still relatively small at 19% of Affirm's active users, we believe that growth in the Affirm Card continues to show promise in entrenching customers in Affirm's ecosystem. Active card users grew 125% from a year ago, and users generated about twice the volume of active customers overall.

The bottom line: We plan to increase our $67 per share fair value estimate for narrow-moat Affirm by a mid- to high-single-digit percentage after incorporating strong quarterly results and updated guidance. Even after this update, shares look overvalued. For fiscal 2027, we anticipate continued volume growth to come from the acquisition of more active users and new merchants. We expect gross merchandise volume to grow at a slightly slower pace, in the high-20% range, although this is mostly due to base effects given stronger-than-expected results in fiscal 2026. Although we agree with management's relatively conservative guidance, consisting of similar growth prospects and slight improvement in operating margins compared with fiscal 2026, we think the market is overextrapolating near-term results into the far future.

We are decreasing our fair value estimate to $66 per share from $67. The decrease in our fair value estimate comes from higher expense growth projections, partially offset by strong revenue growth expectations. Our fair value estimate translates to a fiscal 2027 price/earnings ratio of 28.83 times. This valuation is sensitive to transaction volume projections, loan growth, and credit cost assumptions.

We expect Affirm to continue to enjoy rapid transaction volume growth. Expansion of its partnership with payment service providers has accelerated its active merchant growth into the low 50s. This, along with improved credit quality, has led to strong transaction volume growth, with fiscal 2025 seeing a 36.7% increase to $50.2 billion. While we see a long growth runway for Affirm, we do expect volume growth to decelerate over time, particularly if the labor market shows signs of weakness. We expect transaction volume to increase 31% and 26.8% in fiscal 2027 and 2028, respectively.

After decreasing in fiscal 2026, we think Affirm’s merchant network revenue as a percentage of transaction volume will remain largely stable during our projection period. In practice, this figure is sensitive to mix shifts, as the long-term 0% loans carry the highest merchant fee rate and have been volatile relative to the rest of the firm. In 2023, this product actually saw decreasing transaction volume, while more recently it has been outperforming the firm's average, with fiscal 2026 growth coming in at a blistering 46.8%.

Our fair value estimate assumes that Affirm will continue to enjoy significant investor demand for its loans, with just over half of its outstanding loans sold to external investors. Affirm’s existing financial position is strong enough to fully support its business if new investment demand dried up, enabling it to expand its balance sheet. However, if Affirm were forced to do this, it would substantially constrict the firm's growth potential

We expect Affirm’s long-term net charge-off rate to come in at 7.4% of average receivables. This is higher than the five-year weighted average of 7.1% but below the 7.7% reported in fiscal 2025 and in line with the 7.5% seen in fiscal 2026. Buy now, pay later users are disproportionately financially weaker than nonusers, and we do expect Affirm to face elevated credit costs if economic conditions deteriorate. This risk is offset by Affirm’s ability to tighten or loosen its underwriting rapidly, thanks to the short-term nature of its loans, and we think that even if credit losses increase, Affirm will be able to adjust quickly, protecting it from severe losses.

Fiscal 2025 was Affirm’s first year of profitability as the company is still in its growth stage. As Affirm matures, we expect its operating margin to continue to expand, driven by increased scale against fixed costs and lower marketing spending relative to revenue, reaching 28.8% by 2035. This is roughly in line with other consumer lenders in our coverage when adjusted for Affirm’s use of gross interest income in its accounting.

In our view, Affirm has a narrow Morningstar Economic Moat Rating that will allow it to earn returns above its cost of capital over the next decade. The company’s moat is defended by a network effect, thanks to its position as a two-sided network connecting merchants and consumers, and by a cost advantage, from the ability to lend to financially weak consumers without suffering excessive credit costs.

Affirm’s platform works by attracting both merchants and consumers, thereby increasing the value it provides to both parties, which in turn drives network effects in its business. Merchants have more incentive to offer Affirm at checkout and pay for 0% financing options if Affirm can provide access to a large consumer base that responds to additional payment options with incremental sales and larger ticket sizes. Additionally, as Affirm signs up more merchants, its platform becomes more appealing to consumers, drawing in more users. Affirm’s loans are serviced through its app, where consumers are shown other retailers that they can use Affirm at, driving additional engagement. The app is also where Affirm markets and manages its physical card, which is enjoying rapid adoption.

While Affirm’s interest-bearing loans can be offered without an existing merchant relationship, network effects still play an important role in that side of the firm’s business. Even if loans can technically be offered without merchant input for buy now, pay later providers, placement at a merchant’s checkout page or point of sale is a critical driver of volume. While more than 70% of Affirm’s transaction volume is interest-bearing, less than 25% of Affirm’s volume is sourced from its mobile app, website, or physical card. The majority of Affirm’s business comes from availability at the merchant itself, which requires an existing relationship. Additionally, a disproportionate number of Affirm’s new customers come from its 0% financing offers and then become regular users of its interest-bearing loans for future purchases. As a result, while new entrants to the buy now, pay later space do not need to replicate Affirm’s merchant network to replicate its core product, they would face significant headwinds in obtaining meaningful volume without establishing the same merchant relationships.

In general, unsecured consumer lending in the US is highly lucrative due to the scale of the market and the high interest rates that are the industry standard, with credit card APRs now reaching well over 30%. However, competitive entry into the space has historically been limited due to the difficulty of creating effective underwriting models. Consumers expect credit decisions to be near-instantaneous, requiring only limited information and no documentation. Incumbents can meet these expectations without suffering from excessive credit cards, thanks to their large data pools of past credit results that can be combined with third-party datasets. Without this credit data, new firms entering the market must be willing to incur excessive credit costs for years as they build their internal datasets. Goldman Sachs' and Ally Financial’s recent efforts to expand into unsecured consumer finance failed as both firms faced higher-than-expected credit losses and poor growth.

With over $100 billion in transaction volume over the last five years, Affirm has developed sufficient underwriting prowess to be on the right side of this dynamic, and it has a competitive advantage over new buy now, pay later firms. While the firm has not been tested in a full recession, we think its ability to rapidly adjust its credit standards gives it a structural advantage over the credit card issuers, while the scale of its transaction data provides an advantage over potential new entrants.

On a broader level, Affirm benefits from being able to siphon borrowers away from credit card issuers, particularly from private-label cards. Credit card portfolios feature both active borrowers and “transactors,” who pay their balance off in full each month, generating no interest income for the card issuer, but whose receivables the bank still needs to finance. With some notable exceptions, most credit card portfolios see poor profitability in transactor accounts. As a result, these accounts are subsidized by cardholders with active balances, who have seen card APRs rise more than the federal-funds rate over time.

Affirm’s business model is differentiated from that of credit cards, as all of its receivables are profitable, either through interest income or merchant fees. Affirm does not need to subsidize a portion of its user base through higher profitability in another segment. As a result, Affirm can offer better terms to its borrowers by eliminating compound interest and late fees, creating a superior alternative to credit card borrowing. This advantage is particularly pronounced against private-label card issuers, which see a significant portion of their revenue come from late fees (upward of 25%) and lose money on a per-transaction basis. This dynamic has also limited how aggressively credit card issuers have marketed their own buy now, pay later offerings, as they must consider the potential to cannibalize their existing credit card borrowers. This is particularly true since buy now, pay later is still a relatively small threat to the major credit card providers. Including loans that Affirm has sold and for which it has servicing agreements, the firm’s outstanding receivables stand at around $15.1 billion, compared with over $1.2 trillion in credit card debt and another $250 billion in personal loan debt industrywide. We see plenty of room for Affirm to grow and reach maturity before it becomes a large enough threat for credit card issuers to risk jeopardizing their own loan economics to respond to. As a result, we expect Affirm to continue to take share in the consumer finance space while retaining attractive unit economics.

If transaction volume on the Affirm card continues to grow at such a high rate, it would reduce the firm’s reliance on any individual merchant partner and likely generate more repeat customer transactions.

If international expansion efforts are successful, the firm’s total addressable market will increase materially.

Accelerated growth in Affirm’s long-term 0% APR product could drive higher revenue per dollar of transaction volume.

As the buy now, pay later space reaches maturity, competition among providers could increase, leading to lower merchant payment rates for Affirm’s 0% financing options.

If investor demand for Affirm’s loans deteriorates, the company will be forced to hold more of the loans it makes on its balance sheet, limiting its growth runway.

Affirm benefits from half-hearted competition from card-issuing banks. This could change as the buy now, pay later market increases in size and relevance.