Company Breakdown

11/05/26 – 18/05/26

Klarna breaks even for first time since 2025 IPO:

Current share value: $15.16 per share.

Support near lower 5-week price channel ($13.50)

Resistance at approximately $16.50

Klarna’s business model at its core is a partnership with retail stores by letting customers buy now and pay later in interest-free instalments. However they have recently pivoted to becoming an official digital bank, now focusing on the issuance of debit cards (generating a small revenue every time a transaction is made). They have also begun issuing long term loans funded by customer deposits to be paid back in instalments with interest – labelled the “fair financing product”.

This evolution of Klarna’s model has inevitably driven up provisions. Since the 2008 financial crisis, banks have been required to estimate future loan defaults and set aside cash reserves in line with these estimates. As a result Klarna have had to reserve a significant amount of cash; recorded as a non-cash expense that year. However, if loan defaults turn out to be lower than Klarna anticipates, these cash reserves can be released back through earnings, increasing profits that year. Moreover although provisions are higher in absolute dollar terms than last year, this is actually a smaller proportion of overall income, as Klarna has grown substantially over the past year. There has been a 44% spike in debit card sign-ups, 21% more active users and gross merchandise volume (recording total sales on a platform pre-costs) has reached $33.7bn.

This growth underpins this week’s breakthrough news of Klarna breaking even for the first time since its 2025 IPO, reporting approx. $1 million in net income compared to a $99 million loss last year. Klarna are also beginning to offset the rising provisions that come with long term loans by packaging up and selling portions of its loan portfolio to investment banks through Significant Risk Transfer (SRT) transactions. This means that investment banks receive the repayments and interest from the loans, but also adopt the risk of default if customers don’t repay. This reduces risk on Klarna’s balance sheet, giving them more regulatory capacity to lend more.

How is the market valuing Klarna today?

Klarna has lost significant market momentum since the 2025 IPO, and the stock has been pushed substantially below its initial valuation. This was a result of its shift towards the long-term loan model (as discussed above) which ignited fears about future credit losses and rising provisions. Klarna today is valued at roughly $6.11bn in market cap, down materially from the $15.1bn valuation at IPO. However, its $3.5 billion in annual revenue implies a price-to-sales (P/S) ratio of 1.745 (market cap / revenue), which in my opinion appears modest for a high-upside potential fintech business.

The market appears divided on Klarna. Bulls like Cathie Wood have argued that the company is undervalued given rapid user growth, rising gross merchandise volume and improving profitability. On the other hand bears (such as Tiger Brokers) are worried about both materially worsening defaults and rising regulatory scrutiny surrounding BNPL products.

My take on Klarna’s valuation:

The challenge for me in valuing Klarna through comparables is that it now sits between categories. Before its business model pivot, Klarna was quite an easy to assign BNPL platform, comparable to Affirm. Yet as it expands into deposits, debit cards and longer-term lending, it indeed now resembles a digital bank similar to the model of PayPal (albeit PayPal also focuses on business financing, whereas Klarna is strictly consumer-focused). 

Rather than assigning a price target – which you can get from half of Wall Street banks – my analysis will focus on the near-term factors that will affect Klarna’s future share price. Specifically how these factors change the inputs of DCF and relative valuation models.

1) Factors impacting long-term profitability and free cash flow (DCF):

• Given the shift into long-term financing, Klarna’s profitability will increasingly depend on customer repayment behaviour. If defaults are lower than expected, provisions will fall and earnings could improve materially. On the flip side, if defaults are greater than expected provisions will rise, profits will fall and free cash flow will be squeezed.
• Customer deposits could become a cheaper funding source than institutional borrowing. Lower funding costs would improve lending margins and future cash flows.
• It is worth also paying close attention to debit card sign-up growth, as a higher volume of transactions will generate solid.
• Stricter BNPL regulation in the future could increase compliance costs, or require higher capital reserves for potential credit defaults, which would raise provisions even higher than their current rate and lower future profitability.

2) Factors impacting Klarna’s market competitiveness (input for relative valuation models)

• If Klarna generates revenue faster than comparable fintech firms, investors may justify a higher valuation multiple.
• If Klarna demonstrates lower default rates than other lenders through more disciplined underwriting (ie: checking live bank balances as opposed to just previous credit scores) then investors may be willing to pay a premium.

Overall, based on the current market valuation of Klarna and the growth I project for the company, I consider it to be an excellent buying opportunity. This thesis is strongly dependent on the performance of its Fair Financing product, but forward projections look positive, and I am optimistic on its outlook over the next few years. Let’s see how it does!

(NFA)