Issue #88

We break down the business models and Q2 performance of the top two leaders in Buy Now, Pay Later.

The "Buy Now, Pay Later" (BNPL) revolution isn’t being won by the companies offering the most debt—it’s being decided by the platforms that offer the most transparency and financial control. As consumers move away from the "debt trap" of high-interest credit cards, two distinct players are rewriting the rules of how the world pays for everything from a $50 pair of shoes to a $5,000 home renovation.

This is where the fintech conversation shifts from simple payments to a complete commerce ecosystem—and where the most disciplined, profitable winners are emerging.

👉 One company has become the "modern-day American Express," integrating directly with the world’s largest retailers to provide transparent, interest-bearing installments at the point of sale.

👉 The other is a high-growth disruptor that has turned BNPL into a subscription-based loyalty tool, focusing on credit-building and mission-driven financial health.

👉 Both have successfully crossed the bridge into GAAP profitability, proving that the BNPL model is not just a trend, but a sustainable, high-margin pillar of the global economy.

In this edition, we break down the enterprise powerhouse and the subscription-led innovator leading the charge—and why these two stocks are currently capturing the most "Buy" ratings in the fintech sector.

Affirm (NASDAQ: AFRM)

Affirm (NASDAQ: AFRM) is a leading "Buy Now, Pay Later" (BNPL) network that provides consumers with a transparent alternative to traditional credit cards. By integrating directly with merchants, Affirm offers point-of-sale financing that ranges from short-term interest-free payments to longer-term installments, all with a strict "no late fees" policy.

Business Model and Revenue Streams 📦

Affirm’s business model is centered on creating a frictionless payment ecosystem that benefits both consumers and merchants. Unlike traditional lenders that rely heavily on compounding interest and penalty fees, Affirm positions itself as a "message router" that facilitates high-intent commerce. The company operates through several key revenue channels:

• Merchant Network Fees: Affirm charges merchants a fee for every transaction processed through its platform. Merchants are willing to pay this because Affirm typically increases average order value (AOV) and conversion rates.
• Interest Income: While many of Affirm's products are 0% APR, more than 70% of its transaction volume comes from interest-bearing loans. These loans provide a steady stream of income based on the credit extended to consumers for larger purchases.
• Virtual Card and Affirm Card: The company has expanded its direct-to-consumer footprint with the Affirm Card, which allows users to pay in installments anywhere Visa is accepted. This has become a massive growth engine, with Affirm Card GMV growing 135% year-over-year in the most recent quarter.
• Servicing and Gain-on-Sale: Affirm earns fees by servicing the loans it originates and through the sale of loans to third-party investors, which helps maintain a capital-light balance sheet.

The company is highly sensitive to macroeconomic policies, particularly interest rate fluctuations. Higher interest rates generally increase Affirm's funding costs, though the company has proven resilient by optimizing its "Revenue Less Transaction Costs" (RLTC) margins. Additionally, Affirm’s underwriting models are designed to adapt in real-time to shifts in consumer credit health, allowing them to maintain steady credit outcomes even during inflationary periods.

Recent Performance and Corporate Developments 📈

Affirm has recently reached a major milestone, shifting from a high-growth "cash burner" to a profitable enterprise. The company reported standout results for the second quarter of fiscal year 2026 (ended December 2025).

Q2 2026 Financial Highlights: 💰

• Total Revenue: Affirm generated $1.12 billion in revenue, a 30% increase year-over-year, beating analyst estimates of $1.06 billion.
• Net Profit: The company posted a net income of $129.6 million for the quarter, a significant leap from the narrow profits seen in late 2025.
• Gross Merchandise Volume (GMV): GMV grew by 36% to $10.8 billion, driven by strength in travel, ticketing, and general retail.
• Active Merchants: Partner counts grew by 42%, reaching over 419,000 active merchants.

Strategic Initiatives and Partnerships: 🤝

Affirm has been aggressive in expanding its partner ecosystem rather than through traditional mergers. In February 2026, the company announced a major partnership with Lowe’s to offer flexible financing for home improvement. Other recent high-profile integrations include Wayfair’s expansion into the UK and Canada, and a strategic alliance with Fiserv to bring BNPL options to debit card users. Furthermore, Affirm has officially applied for an industrial loan company (ILC) charter, a move that would provide regulatory certainty and potentially lower its long-term cost of capital.

Profitability and Fair Value 🎯

Affirm has entered a "margin story" phase. After years of losses, it has now achieved trailing 12-month profitability, with net income reaching $282.3 million as of early 2026. The path forward focuses on:

• Operational Leverage: By scaling its "BoostAI" technology, which automates merchant promotions, and increasing the adoption of the Affirm Card, the company is growing revenue faster than its fixed costs.
• Capital Market Execution: Recent Asset-Backed Securities (ABS) deals have priced with spreads not seen since 2021, signaling that the market has high confidence in Affirm's loan quality.

Regarding Fair Value, the stock presents a classic growth-versus-value debate. It currently trades at a trailing P/E of approximately 67x, significantly higher than the diversified financial industry average. While some analysts suggest an intrinsic fair value closer to $64 to $75 based on projected earnings growth of 32% per year, bears point to the company's premium valuation and debt-to-cash flow coverage as risks. However, its PEG ratio of 0.27 suggests the stock may actually be undervalued relative to its massive growth potential.

Analyst Estimates and Ratings 📊

• Consensus Rating: The consensus remains a "Buy." In the last 30 days, Affirm has seen a surge in positive sentiment, with approximately 72% of analysts covering the stock issuing a Buy or Strong Buy rating.
• Price Targets: Analysts have been busy raising targets following the Q2 earnings beat. While the median target is roughly $75.50, aggressive bulls like Mizuho have set targets as high as $108, representing significant upside from current levels. Firms like Compass Point recently raised their target to $68, citing "strong execution" and "gaining market share."

Investor-Focused Takeaway: Is AFRM Right for Your Portfolio?

Affirm is no longer just a "niche" payment option; it is evolving into a full-scale financial ecosystem that CEO Max Levchin describes as a "modern-day American Express." For investors, the combination of newfound profitability and a rapidly expanding merchant network makes it a compelling growth play.

What to Watch in the Near Term: 📈

• The May 2026 Investor Forum: Management is expected to unveil a new medium-term financial framework, which could serve as a major catalyst for the stock.
• International Expansion: Monitor the growth of Affirm's footprint in the UK, as this represents their first major test of the business model outside North America.
• Interest Rate Pivot: Any downward movement in federal interest rates could significantly lower Affirm's transaction costs, leading to even wider profit margins.

Recommendation:

Affirm (AFRM) is a high-conviction "Buy" for growth-oriented investors. The company has successfully navigated a high-interest-rate environment and emerged profitable, with its Affirm Card and new enterprise partnerships providing a clear runway for double-digit growth through 2027.

Sezzle (NASDAQ: SEZL)

Sezzle (NASDAQ: SEZL) is a purpose-driven digital payment platform that has carved out a unique niche in the BNPL space by focusing on financial empowerment. Unlike larger competitors that focus primarily on high-volume retail, Sezzle differentiates itself through a mission to help users build credit and manage budgets responsibly.

Business Model and Revenue Streams 📦

Sezzle’s business model is built on a "win-win" ecosystem that prioritizes consumer financial health alongside merchant sales. The company has successfully pivoted from a pure transaction-based model to a diversified revenue structure that emphasizes recurring income:

• Merchant Fees: This remains the core engine. Sezzle charges retailers—ranging from small businesses to enterprise partners like David’s Bridal—a percentage of each transaction (typically 3%–7%). Merchants accept this fee to benefit from higher conversion rates and reduced cart abandonment.
• Subscription Revenue (Sezzle Premium and Anywhere): A major differentiator for Sezzle is its paid subscription tier. For a monthly fee, users gain access to "Sezzle Anywhere" (allowing them to use Sezzle at non-partnered merchants via a virtual card) and other exclusive perks. This provides Sezzle with predictable, high-margin recurring revenue.
• Consumer Fees: While Sezzle focuses on interest-free "Pay in 4" models, it generates secondary revenue from rescheduling fees and late fees. However, its "Sezzle Up" program encourages on-time payments by allowing users to report their payment history to credit bureaus, aligning the company's incentives with the user's financial progress.

Macroeconomic Impact: Sezzle is strategically positioned to benefit from a "trade-down" effect. In periods of high inflation or economic tightening, consumers often shift from traditional high-interest credit cards to interest-free BNPL solutions for essentials. While higher interest rates increase the company's funding costs for its receivables, Sezzle’s focus on short-duration, low-risk loans allows it to recycle capital quickly and adjust underwriting in real-time.

Recent Performance and Corporate Developments 📈

Sezzle has undergone a remarkable financial transformation over the last year, moving from a micro-cap underdog to a consistently profitable fintech player.

Recent Financial Highlights: 💰

• Q3 2025 Performance: Sezzle reported a record-breaking quarter with total revenue of $116.8 million, a 67% increase year-over-year. For the first time in its history, quarterly Gross Merchandise Volume (GMV) exceeded the $1 billion mark.
• Profitability: The company posted a GAAP net income of $26.7 million for Q3, representing a strong 22.8% net margin. Earnings per share (EPS) grew 70.5% year-over-year to $0.75.
• Efficiency: Adjusted EBITDA reached $39.6 million, a 74.6% increase, signaling that the company is scaling its revenue much faster than its operating expenses.

Recent News and Mergers: 🤝

There have been no recent mergers, as Sezzle is currently focused on organic scaling and capital return. Significant recent developments include:

• S&P SmallCap 600 Inclusion: In December 2025, Sezzle was added to the S&P SmallCap 600 index, a major validation of its market cap and liquidity.
• Stock Buybacks: Following the completion of a $50 million repurchase program, the Board authorized an additional $100 million buyback in late 2025, demonstrating management's confidence in the stock’s value.
• CFO Transition: In January 2026, the company announced the appointment of Lee Brading as the new CFO, ensuring a smooth leadership transition as the company matures.

Profitability and Fair Value 🎯

Sezzle is currently one of the few BNPL firms that is not only profitable but is growing its margins aggressively. Its path to sustained value is driven by "Monthly On-Demand & Subscribers" (MODS), which grew to nearly 800,000 users by late 2025. By migrating users from free plans to paid subscriptions, Sezzle is increasing its "Lifetime Value" (LTV) while keeping customer acquisition costs relatively low.

In terms of Fair Value, the stock is often cited as a "growth at a reasonable price" (GARP) candidate.

• Valuation Gap: While the stock has seen high volatility (with a 52-week range of $24.86 to $186.74), it currently trades at a forward P/E of roughly 20x.
• Intrinsic Estimates: Some analysts and valuation models place its fair value near $99.60, suggesting significant upside from recent trading levels in the mid-$60s. The company’s Return on Equity (ROE) exceeding 100% is a rarity in the fintech sector and suggests the business is exceptionally efficient at generating profit from its capital.

Analyst Estimates and Ratings 📊

• Consensus Rating: The consensus rating is a "Buy" or "Moderate Buy." Sezzle has seen a flurry of positive analyst activity in early 2026.
• Recent Ratings: In February 2026, Needham initiated coverage with a "Buy" rating and an $85 price target. UBS also recently set a price objective of $76, while Oppenheimer has been even more bullish with targets reaching as high as $202 in previous updates.
• Earnings Outlook: Analysts are projecting Q4 2025 EPS (to be reported late Feb 2026) to hit approximately $0.98, a significant step up from previous quarters.

Investor-Focused Takeaway: Is SEZL Right for Your Portfolio?

Sezzle offers a high-momentum entry into the fintech space. While it is smaller than Affirm, its superior profitability margins and aggressive share buyback program make it an attractive pick for those who want exposure to BNPL without the heavy "growth-at-all-costs" losses typically associated with the sector.

What to Watch in the Near Term: 📈

• Q4 Earnings (Feb 25, 2026): This will be the key "make or break" moment for the stock's near-term trajectory.
• Credit Quality: As the company pursues "growth-focused underwriting," keep an eye on the provision for credit losses to ensure it stays within the guided 2.5%–2.75% range.
• Subscription Growth: Continued growth in the "Anywhere" and "Premium" tiers will be the primary engine for future margin expansion.

Recommendation:

Sezzle (SEZL) remains a strong "Buy" for investors seeking a profitable, mid-cap fintech with high operational leverage. Its inclusion in major indices and its massive buyback program provide a "floor" for the stock, while its AI-driven shopping tools and subscription model provide the "ceiling" for future growth.

Final Take: The Consumer Network and the Credit Builder Powering Payments

The "Buy Now, Pay Later" revolution isn't just about deferred payments—it’s about conversion at scale. And that requires two things: a seamless merchant network that drives high-value sales and a consumer-centric platform that builds long-term loyalty.

That’s where Affirm (AFRM) and Sezzle (SEZL) stand apart.

💳 Affirm (AFRM) — The Enterprise Operating System for Modern Commerce

• ✔ Deeply integrated with retail giants like Amazon, Shopify, and Lowe’s.
• ✔ Affirm Card and interest-bearing models driving massive GMV expansion.
• ✔ Reached GAAP profitability with a clear path to lowering its cost of capital via an ILC charter.
• ➤ Best for: Investors looking for a high-moat, "Blue Chip" fintech leader that is successfully replacing the traditional credit card model.

📈 Sezzle (SEZL) — The High-Margin Subscription Disruptor

• ✔ Pioneering the "BNPL-as-a-Service" model through high-growth subscriptions.
• ✔ Exceptional capital efficiency with a Return on Equity (ROE) exceeding 100%.
• ✔ Aggressive shareholder-friendly moves, including significant stock buybacks and S&P 600 inclusion.
• ➤ Best for: Investors seeking exposure to a leaner, highly profitable fintech with explosive operating leverage and a focus on consumer financial health.

Investor Insight

🛍️ Want massive merchant scale and enterprise-grade payment infrastructure? → AFRM

🔄 Want high-margin recurring revenue and aggressive capital returns? → SEZL

Bottom Line:

Fintech doesn’t scale on convenience alone—it scales on underwriting precision and ecosystem stickiness.

Affirm owns the "big ticket" checkout experience for the world’s largest brands, while Sezzle is perfecting the high-frequency, subscription-based relationship with the modern shopper.

As the shift away from legacy banking accelerates, AFRM and SEZL aren't just payment alternatives—they are the new foundation of digital finance.

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Happy Trading
​— Team Premium Stock Alerts