Klarna’s stock price tumbled on , despite reporting revenue growth of 38% to $1 billion. The Swedish “buy now, pay later” (BNPL) firm’s shares fell by over 26% during the day, a reaction to adjusted operating earnings that missed expectations and a cautious outlook for .
The market’s disappointment stems from a combination of factors, including slower-than-anticipated growth in adjusted profit – up only 12% – and unexpected cost increases. Klarna also announced a $1.6 billion sale of fair finance receivables, which, while boosting short-term capital, will reduce future revenue streams. Adjusting for this sale, quarterly growth falls to 29%, a figure that appears to have unsettled investors.
Beyond Revenue: Gross Merchandise Volume and Transaction Margins
While revenue figures are important, Klarna’s core engine is its Gross Merchandise Volume (GMV), representing the total value of purchases made through its platform. GMV increased by 32% in the quarter, or 23% in local currencies, demonstrating continued demand for Klarna’s services. The company generates revenue from merchants through transaction fees, which rose to 2.80% in the quarter, and from credit income, particularly from its “fair financing” installment plans.
Fair financing, Klarna’s offering of longer-term installment payments, experienced particularly strong growth, increasing by 165% year-over-year. However, this rapid expansion is also contributing to increased provisioning for potential credit losses. Provisioning for credit losses rose to 0.65% of GMV, up from 0.53% in the same period last year, reflecting the higher risk associated with longer-term financing options. The company noted that the sale of $1.6 billion in fair finance loans also impacted this figure.
Leveraging Consumer Deposits and Card Adoption
Klarna is actively seeking to diversify its funding sources, with a significant focus on attracting consumer deposits, particularly in Germany. The company reported a 37% increase in consumer deposits, reaching $13 billion, benefiting from competitive interest rates and a growing user base. The launch of the Klarna card, a debit card rather than a credit card, is also aimed at bolstering deposit levels, with active card users now exceeding 4.2 million – nearly a doubling from the previous quarter.
Operational cost control appears to be a strength, with Klarna highlighting the use of artificial intelligence to improve efficiency, particularly in customer service. Overall operating costs increased by only 11% in local currencies (18% in dollar terms). However, costs related to transactions – specifically credit losses and processing/credit management – saw more substantial increases, rising by 59% and 56% respectively.
Profitability Concerns and Future Guidance
Despite the revenue growth, Klarna remains unprofitable on a net basis. The adjusted operating profit for the quarter was $47 million, but after accounting for depreciation and amortization ($28 million) and stock-based compensation ($33 million), the company reported a net loss.
Klarna’s guidance for projects revenue growth of over 20%, with GMV exceeding $155 billion and revenue reaching at least $4.34 billion. The company anticipates an adjusted operating margin of 6.9%. Based on these projections, the stock is currently valued at approximately 1.2 times sales and 18 times adjusted operating profit. However, factoring in stock-based compensation, depreciation, and potential taxes, the price-to-earnings ratio rises closer to 50.
The company’s outlook suggests a path towards profitability, but questions remain regarding the sustainability of cost control and the scalability of profits. The combination of these uncertainties and a relatively high valuation makes Klarna a risky investment, even after the recent price decline. The increased provisioning and processing costs highlighted in the earnings report suggest that maintaining profitability while pursuing rapid growth will be a significant challenge.
Klarna’s recent performance presents a mixed picture. While the company continues to demonstrate strong growth in key metrics like GMV and active consumers, concerns about profitability and future guidance have weighed on investor sentiment. The stock’s decline reflects a reassessment of Klarna’s valuation in light of these challenges. The company’s ability to navigate these headwinds and deliver on its promises will be crucial in determining its long-term success.
