Affirm Holdings: A Buying Opportunity Amid BNPL Growth and Strategic Partnerships?

The buy-now-pay-later (BNPL) market is booming, and Affirm Holdings (AFRM) has positioned itself as a leader in the space. Despite recent volatility tied to its high debt load and competitive pressures, the company's Q3 results, strategic partnerships, and AI-driven operational improvements suggest a compelling long-term growth story. Let's dissect whether Affirm's current valuation leaves room for upside—and whether now is the time to buy.

The Numbers: A Strong Quarter, But Debt Lingers

Affirm's Q3 2025 earnings report delivered a 36% year-over-year surge in gross merchandise value (GMV) to $8.6 billion, exceeding even its own guidance. Active merchants rose 23% to 358,000, while transaction volume jumped 45.6% to 31.3 million. Notably, 94% of Q3 transactions came from repeat customers, underscoring sticky user behavior—a critical metric for BNPL players.

The company also raised its full-year 2025 GMV and revenue guidance, projecting $35.7–36.0 billion and $3.16–3.2 billion, respectively. Yet, Affirm's debt-to-capital ratio remains a red flag at 72.8%, far above the industry average of 12.9%. While its cash reserves grew 33% year-over-year to $1.4 billion, investors must weigh growth against leverage risks.

Strategic Partnerships: Fueling GMV Growth

Affirm's partnerships are its lifeblood. The most notable recent deal? Its Costco collaboration, announced in June 2025, which allows members to use BNPL for purchases up to $17,500. This move taps into Costco's 78.4 million U.S. households—a massive, high-income customer base.

The Costco tie-up is a game-changer. BNPL adoption is soaring, with 38% of U.S. consumers using such services by late 2024—up from 24% in 2023. Affirm's plans address a key pain point: large-ticket items like appliances or furniture, which often deter buyers due to upfront costs. By offering 0% APR loans and transparent installment options, Affirm positions itself as a financial enabler for Costco's loyal members.

The World Market partnership, which caused a 15.8% stock rebound, is another win. These deals highlight Affirm's ability to attract merchants across industries, from home goods to fashion (Revolve) and airlines (UATP). With plans to expand into Western Europe via Shopify partnerships, Affirm is scaling beyond its core U.S. market.

AI: The Secret Sauce for Efficiency and Risk Management

While the term “AdaptAI” isn't explicitly mentioned in recent reports, Affirm's AI initiatives are central to its strategy. The company uses machine learning to:
1. Improve credit underwriting: CFO Rob O'Hare cited “healthy repayment rates,” thanks to AI's role in assessing borrower risk. The 0% APR portfolio, skewed toward prime borrowers, reflects this.
2. Cut costs: Sales and marketing expenses dropped 44.3% year-over-year, as AI streamlines targeting and customer retention.
3. Personalize offerings: Dynamic APR adjustments and tailored payment plans enhance user experience, boosting retention.

AI also reduces fraud and operational friction. For a high-growth company like Affirm, these efficiencies are critical to hitting its 22.2% adjusted operating margin—up from 13.6% a year ago.

The Risks: Debt, Competition, and Economic Sensitivity

Affirm isn't without pitfalls. Its debt load is a double-edged sword: while cheap funding fuels growth, rising interest rates could squeeze margins. Rivals like Klarna and traditional banks (e.g., Walmart's shift to Klarna) are poaching merchants, and BNPL's valuation remains contentious.

The U.S. economy also looms large. Affirm's Q3 results came amid slowing consumer spending, especially among lower-income households. If the economy weakens further, borrowers might default, testing Affirm's credit models.

Undervalued? The Case for a Buying Opportunity

Despite these risks, Affirm's fundamentals argue for a cautious bullish stance:
- GMV growth: 36% YoY expansion in a $175 billion market suggests Affirm is capitalizing on a secular trend.
- Margin improvements: Operating margins nearly doubled year-over-year, signaling scalability.
- Partnership pipeline: Costco and World Market are just the start—Affirm's global expansion plans could unlock more revenue streams.

While the Zacks Rank #3 (“Hold”) reflects near-term uncertainty, the stock's current valuation (P/S of 1.2x vs. peers like Afterpay's 3.5x) may not fully account for Affirm's leadership position.

Investment Thesis: Buy the Dip, but Set a Watch List

Affirm is a high-risk, high-reward bet. Investors should:
1. Monitor debt metrics: Track the debt-to-capital ratio and free cash flow generation.
2. Watch for margin sustainability: Can Affirm keep improving profitability while scaling?
3. Stay alert to partnership traction: Costco's rollout and European expansion are key catalysts.

Backtest the performance of Affirm Holdings (AFRM) when 'buy condition' is met on positive quarterly earnings announcements, holding for 20 trading days, from 2020 to 2025.

Historically, such a strategy would have underperformed dramatically: the backtested period (2020–2025) showed a -58.73% average return with a maximum drawdown of -84.98%, underscoring the stock's volatility and the risks of chasing earnings momentum. This data reinforces the need for strict risk management—avoiding overexposure and maintaining tight stop-loss parameters.

For aggressive investors, Affirm's current dips—triggered by debt fears—present a chance to buy a leader in a $175 billion market. However, this is not a “set it and forget it” stock; keep a close eye on execution and macro risks.

Final Take

Affirm's Q3 beat and strategic moves suggest it's not just surviving but thriving in the BNPL space. While debt and competition are real threats, the company's sticky user base, AI-driven efficiencies, and partnerships with giants like Costco hint at long-term dominance. For investors comfortable with volatility, Affirm could be a diamond in the rough—provided they set strict risk parameters.

Final Verdict: Hold for now, but consider accumulating on dips below $15/share—assuming fundamentals hold.