Executive Summary / Key Takeaways

• Affirm is demonstrating strong momentum, achieving GAAP net income in Q3 Fiscal 2025 and projecting full-year GAAP profitability, driven by robust GMV growth and expanding operating margins.
• Proprietary AI-driven technology, including the ITACs risk model and AdaptAI promotions platform, is a core competitive advantage, enabling disciplined real-time underwriting, personalized offers, and efficient operations.
• Strategic initiatives like the Affirm Card, expansion into new merchant categories (e.g., healthcare), and acceleration of international growth (UK, Canada) are driving active consumer growth and transaction frequency.
• A diversified and strengthening capital markets strategy, including warehouse facilities, securitizations, and forward flow deals with partners like Liberty Mutual and Sixth Street, provides ample, flexible funding to support growth.
• While competition is intense and macroeconomic risks persist, Affirm's focus on consumer transparency (no hidden fees, no compounding interest) and disciplined credit management positions it for continued market share gains against traditional and emerging rivals.

The Reinvention of Payments: Affirm's Foundational Strength

Affirm Holdings, Inc. set out with a mission to deliver honest financial products that improve lives, positioning itself as a transparent and flexible alternative to traditional payment options. At its core, Affirm is building a next-generation payment network designed to benefit consumers, merchants, and the broader commerce ecosystem. Founded by Max Levchin, the company's journey began with a focus on leveraging modern technology and a proprietary risk model to offer consumers the ability to pay for purchases over time in fixed amounts, notably without deferred interest, late fees, or penalties – a stark contrast to many legacy credit products and competitor offerings.

This foundational commitment to transparency and consumer-friendly terms is not merely a marketing slogan; it is deeply embedded in Affirm's business model and technology. Unlike traditional credit cards that rely on revolving balances and often opaque fee structures, Affirm's model is built on simple, closed-end installment loans. This approach fosters trust with consumers and encourages responsible spending, which in turn drives repeat usage and strengthens the network.

Affirm operates within the dynamic fintech landscape, competing with a range of players from traditional banks offering installment plans to other Buy Now, Pay Later (BNPL) providers and digital payment platforms. Key rivals include large entities like Block Inc. (SQ), through its Afterpay brand, and PayPal Holdings (PYPL), with its "Pay in 4" product, as well as more niche AI-driven lenders like Upstart Holdings (UPST). While competitors like SQ and PYPL leverage vast existing merchant and consumer networks, Affirm strategically differentiates itself through its core technology and focus on the point-of-sale experience for both online and increasingly offline transactions.

The Engine Under the Hood: Technology as a Competitive Moat

Affirm's competitive edge is fundamentally rooted in its sophisticated technology platform and data analytics capabilities. At the heart of this is its proprietary risk model, known as ITACs (ranging from 0 to 100), which is used to underwrite every transaction in real-time. This model goes beyond traditional credit scoring, incorporating detailed information from external sources (like credit bureaus where available) and internal historical data, including a consumer's prior repayment history on the Affirm platform. This allows for a more nuanced assessment of creditworthiness and the ability to repay.

The tangible benefits of this technology are significant. The real-time nature of the underwriting process enables instant credit decisions at checkout, facilitating a frictionless consumer experience that drives conversion for merchants. The proprietary nature of the risk model allows Affirm to price credit risk more effectively than competitors relying solely on generic scores. While precise, directly comparable quantitative metrics on the speed or accuracy advantage over all competitors are not publicly detailed, management emphasizes that this capability is a key differentiator enabling them to approve more people responsibly as funding costs allow.

Beyond core underwriting, Affirm is actively investing in advanced technologies, including machine learning and artificial intelligence, across its operations. Recent developments include the launch of "AdaptAI," an AI-powered promotions platform. AdaptAI enables Affirm and its merchant partners to deliver personalized financial benefits, such as exclusive APR rates or special repayment terms, directly to consumers via the Affirm App and Affirm Card. This personalization aims to optimize conversion and consumer engagement by tailoring offers to individual needs and risk profiles. Management also highlighted the use of Generative AI (GenAI) internally for productivity enhancements in areas like legal contract analysis and customer dispute resolution, aiming to improve efficiency and scale without proportional headcount increases.

The "so what" for investors is clear: Affirm's technological leadership is not static. Continuous investment in R&D and the deployment of new AI-driven tools like AdaptAI enhance the platform's capabilities, deepen its competitive moat, and directly contribute to key financial outcomes by improving underwriting accuracy, optimizing transaction economics, and driving operational efficiency. This technological foundation supports both growth and profitability objectives.

Performance Reflecting Strategy and Operational Strength

Affirm's recent financial performance underscores the effectiveness of its strategic focus and operational execution. For the three months ended March 31, 2025, total revenue, net, grew by a robust 36% year-over-year to $783.1 million, and for the nine months, it increased by 41% to $2.35 billion. This growth was broad-based, with significant contributions from all key revenue streams.

Merchant network revenue saw increases of 34% and 30% for the three and nine months, respectively, directly correlated with a 36% increase in Gross Merchandise Volume (GMV) for both periods. This GMV expansion was fueled by growth at major merchant and platform partners (representing approximately 45-48% of total GMV), an expanding active merchant base (reaching ~358,000), and crucially, growth in active consumers (~21.9 million, up 21% year-over-year) and transactions per active consumer (increasing 20% to 5.6). This highlights the network effect in action, with more merchants attracting more consumers, who in turn use the platform more frequently.

Card network revenue demonstrated even stronger growth (64% and 51%), reflecting increased GMV processed through card-issuing partners, driven by the Affirm Card and virtual cards, and a substantial increase in merchants integrating via this channel (from ~1,700 to 35,000). Interest income grew 28% and 37%, aligning with the 25% and 29% increase in the average balance of loans held for investment. Gain on sales of loans surged 89% and 108%, benefiting from higher loan sale volumes and favorable market economics, while servicing income grew 27% and 28% due to the larger portfolio of off-balance sheet loans being serviced.

While operating expenses also increased, driven by factors like provision for credit losses (up 20% and 34% due to loan book growth) and funding costs (up 19% and 28% due to increased debt balances), Affirm demonstrated significant progress towards profitability. The company achieved GAAP net income of $2.8 million for the three months ended March 31, 2025, a notable turnaround from a loss in the prior year. The net loss for the nine-month period also dramatically decreased. This trajectory reflects expanding operating leverage and disciplined cost management, even while investing in growth initiatives.

Affirm's capital-efficient funding model remains a cornerstone of its operations. The company leverages a diverse mix of funding sources, including warehouse credit facilities, asset-backed securitizations, and forward flow arrangements with third-party investors. As of March 31, 2025, Affirm reported strong liquidity with $2.1 billion in cash and available-for-sale securities, complemented by significant available funding capacity. Management emphasizes that this diversified approach provides resilience against market volatility and ample capacity to support planned growth. Recent capital markets activity, including the repurchase of 2026 convertible notes and the issuance of new 2029 notes, further underscores the company's active management of its capital structure.

Credit performance, a critical aspect for a lending platform, remains a key focus. While the allowance for credit losses as a percentage of loans held for investment saw a slight increase (from 5.3% to 5.7%), management attributes this to proactive adjustments in credit criteria and loan mix, not signs of broad consumer stress. They highlight healthy repayment rates and the ability to quickly adjust underwriting based on observed performance in their short-duration loan book. Loan modification programs are utilized to assist borrowers facing financial difficulty, aiming to manage potential losses.

Outlook and the Path Ahead

Affirm's outlook reflects confidence in its continued growth trajectory and commitment to sustained profitability. The company has raised its guidance for the full fiscal year 2025, projecting GMV between $34.74 billion and $35.34 billion and revenue between $3.13 billion and $3.19 billion. Crucially, Affirm reiterated its expectation to achieve GAAP profitability by the end of fiscal Q4 2025 and projects continued expansion in adjusted operating margins, targeting a 200 basis point expansion for FY 2025.

This positive outlook is underpinned by several strategic drivers. The Affirm Card is expected to continue driving repeat usage and higher transaction frequency, with management targeting significant growth in active cardholders and annual spend per cardholder. International expansion, particularly in the UK and Canada, is accelerating through key partnerships with major platforms and merchants, opening up new markets and growth avenues. The focus on leveraging technology like AdaptAI to deliver personalized offers is expected to enhance conversion and consumer engagement further.

Management's guidance philosophy is rooted in conservatism, setting achievable floors while striving to outperform. They emphasize that strong unit economics and expanding margins provide the flexibility to reinvest in growth initiatives, such as compelling 0% APR promotions, which are seen as valuable for acquiring high-quality consumers and strengthening merchant relationships.

However, the path ahead is not without risks. The macroeconomic environment, including potential shifts in interest rates and consumer spending patterns, remains a factor. Regulatory scrutiny, particularly concerning BNPL practices, could evolve. Competition is intense, with rivals actively pursuing partnerships and product enhancements. Affirm's reliance on its funding partners and the health of the capital markets is also a key consideration. Management acknowledges these risks and highlights their strategies to mitigate them, including disciplined underwriting, diverse funding sources, hedging against interest rate risk, and proactive engagement with regulators.

Conclusion

Affirm is at a pivotal point, transitioning from a high-growth, loss-generating startup to a business demonstrating a clear path to sustained profitability. The company's recent financial performance, marked by strong revenue and GMV growth and the achievement of GAAP net income in Q3 FY2025, validates its strategic approach. At the core of this success is Affirm's differentiated technology, particularly its AI-driven underwriting and personalization capabilities, which provide a competitive edge in a crowded market.

The investment thesis for Affirm hinges on its ability to continue executing on its growth initiatives – expanding the Affirm Card's reach, accelerating international presence, and deepening merchant integrations – while maintaining disciplined credit risk management and leveraging its diversified funding model. The projected GAAP profitability for FY 2025 is a significant milestone, signaling the business model's inherent operating leverage. While competitive pressures and macroeconomic uncertainties persist, Affirm's commitment to transparency and its technological foundation position it favorably to capture further market share and deliver value to investors. The focus now shifts to demonstrating consistent profitability and continued efficient growth in the periods ahead.