AfD is the most popular party in Germany for the first time, with a record 26%

Short version is they cannot govern without a coalition partner, but they gain other rights in the parliament, such as filling important positions in the administration. When they reach 1/3 of the votes, so 33% they have a Sperrminorität, which means they can prevent changes in the constitution and also hinder new judges in the constitutional court.

This is post election. They didn't have the majority during the elections, so while it is impressive, it doesn't give them new political powers. Also, they require coalition partners, but nobody is willing to do that. If a coalition can be formed between (looking at the chart) Union, SPD, and Greens, that puts them at >50% giving them a majority to govern.

If the new coalition is formed and they don't get their act together within the time of governance, the next elections could be fatal for democracy in Germany. Honestly, like in most other European countries facing threats to democracy, their current governments must take decisive and quick action to make more people happy. However, current governments are trying to play the nazi's game, and they are predictably losing ground because that's not a solution.

Major parties are playing identity politics, trying to be populistic, bundling nazi ideas as their own, or quite simply not uniting like for example the French left-wing parties did (however short-lived that was). They should be:

• decreasing the gap between the rich and everybody else
• improving EU and national sovereignty by promoting non-US products and services to stop the influx of US and Russian propaganda
• taking radical action to make lodging and life in general more affordable (more social housing, making multi-home ownership less attractive, regulating the market more, etc.)
• improving public transport to reduce car dependence to reduce air and noise pollution in cities, which also makes transport more affordable
• providing more education with paid educational leave to allow career switches
• reduce hurdles for creating small businesses and provide guidance for those willing to start businesses
• invest in technology that makes life easier and more comfortable (better internet to reduce trips to office and government offices in particular, subsidies and research into improved heating and heat retention to reduce electricity and gas bills, ...)

and so so much more. A happy, educate populace is much less likely to be duped and and magnitudes less likely to vote against their own interests (like voting for lying politicians or nazis).

That entirely depends on the other parties.

As long as they have less than 50% the other parties could (in theory) band together against them and create a coalition government.

The problem arises when that coalition has to become more diverse. As you can imagine the populist right would rather work together with the far right than with the populist left, so the coalition becomes shaky, paralyzed because they cannot come to agreements. The common denominator will be so small that basically nothing gets done, and the oppositional party will profit from that.

Shaky coalition governments can lead to government breakups and snap elections which in combination with the resulting loss of trust and inability to do anything of the government will likely lead to an even stronger opposition and even more shaky governments or right out majority for the plurality party.

Also, the leader of the opposition usually chairs important committees like the Budget Committee, the opposition also gets important roles in the committees for Foreign Affairs, Internal Affairs and Defense. It also gets priority in debates, which is usually a good thing, since this works as a check and balance to hold government accountable, but when this role is in the hands of populists, they will certainly use it to further their own narrative.