Affirm Holdings: Strategic Momentum and Catalysts for a Potential Valuation Re-Rate

Affirm Holdings (AFRM) has emerged as a key player in the buy now, pay later (BNPL) space, and recent developments suggest the company is poised to capitalize on near-term growth catalysts. With its William Blair presentation on June 5, 2025, Affirm highlighted strategic partnerships, strong financial results, and operational efficiencies that could drive a re-rating of its stock. Here's why investors should pay attention.

The J.P. Morgan Partnership: A Game-Changer for Merchant Reach

Affirm's collaboration with J.P. Morgan Payments, announced in March 2025, represents a critical step in expanding its merchant ecosystem. By integrating Affirm's flexible payment solutions into J.P. Morgan's Commerce Platform, the partnership targets U.S. merchants seeking to offer installment plans without upfront costs. This move directly addresses a key growth lever for Affirm: merchant acquisition.

Why does this matter?
- Merchant diversification: Reduces reliance on any single partner (e.g., Walmart's exit in 2024).
- Scale opportunity: J.P. Morgan's vast network of businesses could rapidly boost Affirm's Gross Merchandise Volume (GMV).
- Revenue synergies: The deal aligns with Affirm's strategy to increase revenue as a percentage of GMV (up to 8.5% in Q2 2025 from 7.9% a year earlier), driven by higher-margin loan sales and network fees.

Q2 2025 Results: Profitability Progress and Unit Economics

Affirm's second-quarter performance underscored its path to profitability, a key metric for skeptics. Key highlights:
- Adjusted Operating Income hit $238 million, a 145% year-over-year increase, with margins expanding to 27% (vs. 16% in Q2 2024).
- Net income turned positive: $80 million, excluding warrant-related expenses, marking progress toward its 2025 breakeven target.
- Credit quality improved: Delinquency rates stabilized near pre-pandemic levels, with recent cohorts tracking toward 3.5% net charge-offs.

The star performer was the Affirm Card, which saw GMV surge 113% year-over-year to $845 million. Active cardholders hit nearly 1.7 million, driven by app redesigns and features like high-yield savings accounts. This product is a cash cow: cardholders generate higher lifetime value (LTV) and recurring revenue, reducing reliance on transactional fees.

Strategic Priorities: AI, International Expansion, and Card Growth

The William Blair presentation emphasized three long-term growth pillars:
1. AI-driven efficiency: An AI chatbot reduced human intervention by 67% during peak periods, cutting costs and improving customer support.
2. Global expansion: The UK launch in late 2024 exceeded expectations, with plans to replicate this in other markets.
3. Card ecosystem: Affirm aims to turn the card into a “top-of-wallet” product, leveraging 0% APR promotions to attract users who then upgrade to cardholders.

These initiatives address two critical risks:
- Unit economics: AI and process automation are crucial for maintaining margins amid rising interest rates.
- Market share defense: Expanding internationally and deepening the card's utility help fend off competitors like PayPal and Afterpay.

Valuation: Is AFRM Still Undervalued?

Analysts project 55.6% annual earnings growth and 18% revenue growth through 2027, with a 13.1% return on equity (ROE) by 2026. However, the stock price has been volatile, dropping 9.5% post-earnings on June 5, possibly due to macroeconomic concerns.

Key valuation points:
- Price target: The consensus $67.36 target (as of April 2025) implies ~36% upside from June 5's $49.10 close.
- Multiples: At current levels, Affirm trades at 3.8x 2025 revenue estimates (vs. 6.5x for PayPal), reflecting skepticism about its path to profitability.

Investment Thesis

Affirm's Q2 results and strategic moves suggest it's executing well on its road map to profitability. The J.P. Morgan partnership, card growth, and AI efficiency gains could re-rate the stock if they translate to sustained margin expansion and GMV acceleration.

Risks to watch:
- Economic slowdown: Higher unemployment or reduced consumer spending could pressure delinquency rates.
- Regulatory headwinds: Credit reporting and BNPL regulations remain uncertain, especially in new markets.
- Competitor moves: PayPal's recent BNPL offerings could intensify price wars.

Conclusion: Buy the Dip?

Affirm's near-term catalysts—J.P. Morgan's merchant network, card-driven LTV growth, and AI cost savings—are tangible and measurable. While the stock faces headwinds from macroeconomic fears, its improving unit economics and strategic progress make it a compelling long-term bet. For investors willing to look past short-term volatility, AFRM could offer asymmetric upside as it transitions from growth-at-all-costs to sustainable profitability.

Investment recommendation: Consider a gradual accumulation of shares at current levels, with a focus on 2025's Q4 results as a key milestone.