Affirm's $1.6 Billion Profit Is Mostly a Tax Accounting Story

Affirm Holdings reported a fiscal fourth-quarter profit of $1.6 billion on Thursday, a figure so far above Wall Street's forecasts that it briefly made the buy-now-pay-later lender look like it had struck oil rather than simply sold more installment loans. Diluted earnings came to $4.62 a share, against an average analyst estimate of roughly 85 cents, and revenue rose 33 percent to $1.17 billion, also ahead of expectations.

Most of the gap between forecast and result did not come from lending more money to more shoppers, though the company did plenty of that too. It came from an accounting decision. Affirm concluded that it no longer needed to fully offset roughly $1.5 billion in deferred tax assets — largely the future tax value of years of accumulated losses — that it had been writing down to zero on its books since shortly after its January 2021 initial public offering. Releasing that reserve, known formally as a valuation allowance, produced a one-time, non-cash income tax benefit of about $1.5 billion, according to Affirm's annual report filed with the Securities and Exchange Commission Thursday. Without it, Affirm's own math shows this would still have been a record quarter, just a far less dramatic one.

The numbers behind the beat

Set the tax item aside, and the underlying lending business had its strongest quarter since Affirm went public. Gross merchandise volume, the total value of purchases financed through the company's installment and pay-in-four products, grew 36 percent from a year earlier to $14.1 billion, extending a streak of 11 consecutive quarters of GMV growth above 30 percent, the company said in a shareholder letter that accompanied the results. Revenue less transaction costs, the internal profitability metric Affirm's management leans on most heavily, rose 39 percent to $589 million, and GAAP operating income more than doubled to $147 million, lifting the operating margin to roughly 12.6 percent of revenue from 6.6 percent a year earlier.

• Active consumers rose 21 percent to 27.8 million, with each using the platform an average of seven times over the trailing year
• Active merchants climbed 51 percent to 571,000, helped by expanding partnerships with payment platforms and independent software vendors
• Affirm Card, the company's debit card that lets holders pay later on everyday purchases, more than doubled its financed volume to $2.8 billion among 5.2 million active cardholders
• Total funding capacity reached $30 billion, up from $26.1 billion a year earlier, enough by Affirm's estimate to support more than $70 billion in annual loan volume

Full fiscal-year GMV crossed $50 billion for the first time, and the company said its average cost of funds fell to 5.8 percent, a decline of roughly a full percentage point from a year ago, as it continued issuing asset-backed securities into a receptive credit market.

How a tax rule became $1.5 billion

Under U.S. accounting rules, a company that has racked up losses is generally required to assume it may never earn enough taxable income to use the tax benefits those losses generate, and it must therefore record a valuation allowance that effectively zeroes out the value of those assets on its balance sheet. Affirm had carried such an allowance against most of its domestic deferred tax assets for years, a reflection of a business that did not turn consistently profitable until recently. Under accounting rules, a sustained run of pretax profitability is treated as objective evidence that those assets are now more likely than not to be usable, which permits a company to reverse the allowance and record the release as a lump-sum benefit in the period it happens.

That is what Affirm's finance team decided this quarter, citing a cumulative three-year run of U.S. profitability and management's outlook for continued taxable income. The company's 10-K filing shows the valuation allowance against domestic deferred tax assets fell from roughly $1.48 billion to $15.1 million, and that the release drove a full-year income tax benefit of $1.4 billion, compared with a $9.3 million tax expense the prior year. Founder and Chief Executive Max Levchin framed the moment with some self-deprecation in his letter to shareholders.

"We have been consistently profitable for the past 12 months. The clear runway to keep this momentum going allowed us — and I had to check with my accountant here — to release the valuation allowance on a majority of our domestic deferred tax assets, boosting net income this quarter to a (currently) ludicrous $1.6 billion."

The change carries practical consequences beyond a single quarter's headline number. Affirm still holds about $3.2 billion in federal net operating loss carryforwards and $4.6 billion at the state level, which means it can continue offsetting actual cash tax bills for years even as its reported effective tax rate, no longer flattered by a shrinking allowance, is expected to settle in the mid-to-high 20 percent range going forward.

A sector turns a corner, unevenly

The scale of Affirm's profit sets it apart even among buy-now-pay-later peers that have only recently reached the black. Klarna, the Swedish rival that listed on the New York Stock Exchange last September, reported net income of just $9 million, or a penny a share, in its most recent quarter on gross merchandise volume of $36.6 billion — more than double Affirm's. The contrast underscores how much of Affirm's headline result this quarter is an accounting artifact rather than evidence that it is now durably more profitable than its competitors, even as its own operating margin, absent the tax item, also outpaced most of the industry.

Investors responded briskly regardless of the nuance. Affirm shares, which closed the regular session at $77.49, jumped roughly 8 percent in after-hours trading to $83.95, according to trading data reviewed after the release. The stock had already carried a Strong Buy consensus into the print; Oppenheimer had lifted its price target to $100 from $87 three days earlier, and other analysts are likely to revisit their models now that the company's reported profitability has jumped so sharply, even if most will need to explain to clients why the increase does not reflect a change in the pace of the underlying business. The quarter also touched merchants well beyond Affirm's usual e-commerce base: the company said it added Bed Bath & Beyond, Crate & Barrel and Etsy as partners during the period and renewed its arrangement with Samsung, part of a merchant count that grew 51 percent even as the top five partners' share of volume continued to shrink.

What happens next

Affirm's guidance for the current quarter, the first of fiscal 2027, calls for GMV of $13.7 billion to $14 billion and revenue of $1.19 billion to $1.22 billion, with an operating margin of 11.5 percent to 13.5 percent — a range that assumes no further one-time tax benefits. For the full fiscal year, management is guiding to GMV above $64 billion, which would mark roughly 27 percent growth, and told investors it hopes to reach $100 billion in annual volume in the coming years. Chief Operating Officer Michael Linford was promoted to president as part of a broader reshuffling of Levchin's direct reports, a move the company described as freeing the chief executive to spend more time on new growth initiatives, including international expansion into the United Kingdom and Australia and a nascent effort called Affirm Edge, which would let other banks and card issuers embed Affirm's underwriting technology directly onto ordinary debit cards.

Whether Wall Street continues to reward the stock will likely hinge less on Thursday's inflated headline number than on whether Affirm can keep expanding its underlying margins once the multiyear cushion from a suddenly usable tax position stops flattering the bottom line. The company itself, in its own understated way, signaled it knows the difference: coverage of the results noted management's repeated emphasis, on the call with analysts, that the quarter was the company's most profitable ever "even without the tax allowance release" — a distinction investors will be asked to keep straight for several quarters to come, as the one-time boost worked its way fully out of comparisons and analysts recalibrated models such as the one described in a pre-earnings analyst preview published earlier in the week.