Affirm Just Crushed Earnings—But Can It Outrun Klarna’s Scale?

Key Points

• Affirm's latest earnings crushed Wall Street expectations, leading shares to soar.
• The company's renewed partnership with Amazon helps to stem Klarna-related fears.
• Rather than picking one or the other, analysts are optimistic about both AFRM and KLAR going forward.

Within the universe of buy-now-pay-later (BNPL) companies, Affirm NASDAQ: AFRM has clearly established itself as a leader. It is growing faster than other key players like Klarna NYSE: KLAR. It also has key partnerships with massive retail companies like Amazon.com NASDAQ: AMZN. Below, we’ll dive into Affirm’s latest earnings and compare it to Klarna to gain an updated outlook on this stock.

Affirm Shows Broad-Based Strength, Shares Gain

In its latest quarter, Affirm posted revenue of $993 million, growing by 34%. This solidly beat expectations of $882 million, or 26% growth. The topline beat helped the company post adjusted earnings per share of 23 cents, more than double the 11 cents expected. For Affirm, gross merchandise value (GMV) is another highly important metric. It looks at the overall value of transactions made through its platform, providing a measure of the company’s market share. GMV rose by 42% to $10.8 billion, a considerable acceleration versus 35% growth a year ago.

Revenue less transaction costs (RLTC) also spiked 60%, much faster than revenue. This indicates that the company’s margins rose. In fact, RLTC as a percentage of GMV increased by 48 basis points to 4.2%. This is one of the company’s most important profitability metrics. It measures how much money the company actually keeps after transaction costs for every dollar spent on its platform. The 4.2% figure was above the company’s long-term target of 3% to 4%, indicating that Affirm is capable of delivering on this goal.

The Affirm Card also continues to be highly successful. Affirm Card GMV rose by 135%, significantly aiding the company’s overall growth rate. Lastly, the company’s 30-day delinquency rate remained healthy between 2% and 3%. The figure was essentially the same as it was this time last year, indicating that customers' ability to make payments on time has not deteriorated. Shares rose over 11% in reaction to these results on Nov. 7.

Affirm vs. Klarna: 2 Different Flavors of BNPL

Given the recent IPO of Klarna, many investors may be wondering whether Affirm or Klarna represents a better BNPL investment. Comparing the two companies' financials provides key insight. Klarna grew its GMV by 25% last quarter (23% on a like-for-like basis). Clearly, Affirm is growing much faster, and thus increasing its market share.

On the other hand, Klarna’s overall GMV is around three times larger than Affirm's at $32.7 billion. This huge scale leads to fears that Klarna could become the “default” BNPL option among consumers and merchants. This could damage Affirm’s long-term growth prospects.

However, Affirm also renewed its partnership with Amazon through January 2031. This helps secure an important source of volume and keeps Affirm highly integrated with one of the world’s largest online retailers. Still, the partnership is not exclusive. Amazon can add other BNPL options at will, potentially diluting Affirm’s volume.

Notably, despite having much higher GMV, Klarna’s $903 million in revenue last quarter was $30 million lower than Affirm’s. This reflects the fact that the significant majority of Klarna’s loans are zero-interest loans. This stands in stark contrast to Affirm. Out of its total transactions last quarter, 72% were interest-bearing. It's not surprising to see Klarna have a much larger GMV given this. As a consumer, 0% interest loans are certainly more attractive than those with interest.

Affirm’s model results in much higher profitability now; it posted an adjusted operating margin of 28% last quarter. Meanwhile, Klarna is currently working to create a massive consumer/merchant ecosystem and wants to gradually become more profitable over time. Klarna’s adjusted operating margin was -1.5% last quarter. These distinct approaches make it hard to say that Affirm or Klarna’s model is inherently better. Ultimately, there is reason to believe that each of these strategies can succeed and allow both stocks to perform well. However, economic downturns that limit consumers’ ability to repay loans are a key risk for both firms.

Wall Street Sees Significant Upside in AFRM and KLAR

Wall Street analysts seem to agree with this notion. The MarketBeat consensus price target on Affirm comes in at just under $87. This figure implies around 32% upside potential. Among analysts who updated their targets after earnings, the average is over $89, implying upside of 36%. The consensus price target on Klarna stands at $49, suggesting 54% upside potential. Bank of America lowered its Klarna price target to $46 after the company’s earnings report, indicating that shares could rise nearly 45%.