AFRM Preview: Will Affirm Get a bank Charter?

Affirm Holdings (NASDAQ: AFRM) is set to report its fiscal second-quarter 2025 earnings after the market closes on February 6. Analysts are closely monitoring the company’s performance, particularly regarding gross merchandise volume (GMV), profitability trends, and Affirm’s progress in expanding its financial services offerings. Wall Street consensus expects Affirm to report an EPS loss of $0.14 on revenue of $598 million, reflecting continued growth but also sustained investment in scaling its business.

Key Drivers for Earnings Growth

Affirm has benefited from strong secular tailwinds in the Buy Now, Pay Later (BNPL) space, which continues to gain traction as an alternative to traditional credit cards. Analysts believe Affirm’s recent partnerships, including its integration with Apple Pay Later, should provide a boost to transaction volumes. Additionally, the company has seen robust spending in key categories such as travel and consumer electronics, signaling solid demand among consumers despite broader macroeconomic uncertainty.

A major factor driving analyst optimism is Affirm’s improving unit economics and operational leverage. As the company scales, it has been able to manage costs more effectively while increasing recurring transactions from its existing user base. Several analysts project that Affirm will approach GAAP profitability in fiscal 2025, with significant improvement in adjusted operating income margins in the coming quarters.

Challenges and Risks

While Affirm’s outlook remains positive, several risks could impact its near-term financial performance. One concern is rising funding costs, which could pressure Affirm’s ability to maintain attractive loan pricing. The company relies on forward flow agreements to fund its BNPL offerings, and any tightening in capital markets could impact Affirm’s margins.

Additionally, regulatory scrutiny remains a potential headwind for the BNPL industry. Affirm and its peers have largely operated outside of traditional lending regulations, but increased oversight from financial regulators could lead to compliance costs or restrictions on loan terms. Needham analysts have suggested that Affirm could mitigate some of these risks by obtaining a banking license, which would improve its funding costs and regulatory positioning. However, this process would require regulatory approval and could take significant time to implement.

Growth in New Segments

Affirm has been actively expanding its business beyond BNPL transactions. One key initiative is the Affirm Card, which provides consumers with a flexible credit option for everyday purchases. Analysts believe this card could meaningfully expand Affirm’s total addressable market (TAM) and drive higher engagement among existing users.

Additionally, Affirm continues to expand internationally, particularly in the UK market, where it competes with Klarna. A recent analysis from Mizuho suggests that while Klarna remains significantly larger in terms of GMV, Affirm’s focus on interest-bearing loans results in higher profitability per transaction. If Affirm can continue narrowing the gap with Klarna while maintaining its margin advantage, it could solidify its position as a leader in the global BNPL market.

Analyst Sentiment and Price Targets

Affirm has received a wave of analyst upgrades heading into its earnings report. Compass recently raised its rating from Sell to Neutral and increased its price target from $20 to $61, citing improved growth visibility and operating leverage. JMP also upgraded the stock, emphasizing Affirm’s potential to disrupt the credit card industry and benefit from a more favorable regulatory landscape.

Meanwhile, Jeffries raised its price target to $82, pointing to Affirm’s strong partnerships, improving unit economics, and positive credit performance. Analysts at Deutsche Bank and BTIG also increased their targets, highlighting Affirm’s expanding profit margins and strategic initiatives.

Market Expectations and Stock Performance

Affirm shares have surged over 38% since its last earnings report, reflecting strong investor confidence in its long-term growth trajectory. However, given the sharp rally, expectations are high, and any earnings miss or cautious guidance could trigger a pullback. Investors will be paying close attention to Affirm’s commentary on GMV trends, cost controls, and plans for future expansion.

Conclusion

Affirm’s upcoming earnings report will be a crucial test for the company as it seeks to solidify its position in the BNPL industry and demonstrate a path toward sustainable profitability. While strong growth and improving margins support the bull case, risks related to funding costs and regulatory changes remain in focus. With a stock that has already seen significant gains, Affirm will need to deliver strong results and an optimistic outlook to maintain its momentum in the market.