Is Affirm (AFRM) Being Undervalued Despite Strong Earnings?

The recent Q4 2025 earnings report from Affirm (AFRM) has sparked a critical debate among investors: Is the stock undervalued despite its robust financial performance? While the company delivered a historic turnaround in profitability and outperformed expectations on key metrics, its post-earnings stock price trajectory has been volatile, raising questions about whether the market is underappreciating its fundamentals. This analysis examines the interplay between Affirm's financial strength and market sentiment to determine if the stock is being unfairly discounted.

Fundamentals: A Story of Turnaround and Growth

Affirm's Q4 2025 results were nothing short of transformative. Revenue surged 33% year-over-year to $876.4 million, exceeding analyst estimates by $39.4 million. Earnings per share of $0.20 far outpaced the projected $0.11, while the company posted a net income of $69.2 million-a stark contrast to the $45.1 million loss in the prior-year period. This marked Affirm's first quarter of operating income profitability, a milestone that underscores its improving operational efficiency.

The company's Gross Merchandise Volume (GMV) also soared by 43% to $10.4 billion, driven by a 95% repeat borrower rate and a 50% first-time user penetration rate in 0% APR products. Innovations such as the AI-powered checkout tool, Adapt AI, further amplified growth, contributing to a 5% average GMV boost for participating merchants. Meanwhile, the Affirm Card business reached $1.2 billion in annualized GMV, with a 10% attach rate, signaling strong cross-selling potential.

These metrics highlight a company in ascension. As CEO Max Levchin noted, Affirm is "firing on old pistons," with strategic initiatives like international expansion (including UK tests with Shopify) and enterprise merchant integrations poised to drive long-term growth.

Market Sentiment: Optimism Tempered by Caution

Despite these fundamentals, Affirm's stock price reaction post-earnings was mixed. Shares initially surged 10.6% following the report, reflecting investor enthusiasm for the results. However, this momentum faltered as concerns over competition and debt levels emerged. By the following week, the stock had retreated by 3.6%, with analysts citing Klarna's planned U.S. IPO as a potential threat to Affirm's market share.

The company's high debt-to-capital ratio of 71.8% also raised eyebrows, with some investors questioning its ability to sustain growth amid rising interest rates. Yet, this skepticism contrasts sharply with the bullish outlook from analysts. Following the earnings release, several analysts raised their price targets by 40% or more, citing Affirm's first-time profitability and projected fiscal 2026 GMV exceeding $46 billion. Adjusted operating margins are expected to surpass 26.1%, further reinforcing confidence in the company's long-term trajectory.

Valuation: A Discrepancy Between Numbers and Perception

The disconnect between Affirm's fundamentals and market sentiment suggests a potential undervaluation. While the stock's short-term volatility reflects macroeconomic and competitive risks, its financial performance-particularly the shift to profitability and 43% GMV growth-points to a company with durable competitive advantages. The AI-driven checkout tool and card business, for instance, demonstrate Affirm's ability to innovate and capture incremental revenue streams.

Moreover, Affirm's debt load, though significant, appears manageable given its improving cash flow. The company's Revenue Less Transaction Cost (RLTC) margin is projected to remain in the 3%-4% range, a healthy range for a fintech firm in its growth phase. Analysts' revised price targets, which now incorporate optimism about Affirm's international expansion and enterprise partnerships, further indicate that the market may be underestimating its long-term potential.

Conclusion: A Case for Strategic Investment

Affirm's Q4 2025 results present a compelling case for undervaluation. The company's financial turnaround, operational efficiency, and product innovation outpace its stock's post-earnings performance, which remains influenced by short-term macroeconomic and competitive concerns. While risks such as Klarna's IPO and debt levels warrant caution, the fundamentals suggest that Affirm is well-positioned to capitalize on its momentum. For investors with a medium- to long-term horizon, the current valuation offers an opportunity to participate in a fintech leader that is not only surviving but thriving in a competitive landscape.