The Swedish fintech company Klarna has attracted lots of attention lately, not only because its core business is bringing in huge revenues, but also because the brand is now rapidly becoming one of the main players in the currently fashionable and high-growth “buy now, pay later” sector.
We examine Klarna’s business model, take a quick look at some of the firm’s most important rivals, and see if and how investors can get exposure to this exciting and promising stock.
What Is Klarna?
Klarna is an online financial services platform providing payment solutions for Internet store-fronts and other online businesses.
The firm develops software infrastructure that facilitates direct payments and post-purchase reimbursements for its users, and has recently started issuing fully-fledged bank accounts to a select number of its German customers.
In addition to this, Klarna also offers a deferred payment option to shoppers with its “buy now, pay later” product as a feature of its online checkout process.
The company is headquartered in Stockholm and Berlin, and has a current workforce of more than 4,000 employees. Klarna mainly operates in variety of countries spread across Europe, North America and Oceania.
Who Owns Klarna?
Klarna is owned by its three co-founding members: CEO Sebastian Siemiatkowski, who owns 8% of the company; Victor Jacobsson, who’s no longer with the business, but still retains 10% of the company’s shares; and Niklas Adalberth, who is Klarna’s Deputy CEO, and owns about 0.4% of the firm.
Klarna also receives investment backing from a wide number of sources, including:
- Dragoneer Investment Group,
- Sequoia Capital,
- Walerud Ventures,
- Technology Crossover Ventures and
- Arctic Ventures.
How Much Is Klarna Stock Worth?
In June 2021, just after Klarna finalized its latest fundraising round to the tune of $639 million, the company was estimated to have a market capitalization of $45.6 billion.
Is Klarna Publicly Traded?
At the present time, Klarna is not yet a publicly-listed company, but the firm has indicated that it intends to float sometime in the near future.
A spokesperson for the business indicted that it will forgo the alternative, though increasingly popular, SPAC route, preferring the more traditional IPO process instead.
Source: Unsplash
How Can I Buy Klarna Shares?
Despite the fact a company is not always listed on a publicly-traded exchange, that doesn’t mean it’s still not possible to buy stocks and shares in that business.
However, for the average investor, it can be difficult to acquire a stake in a private company, since shares are normally only offered to current employees, or through special private stock allocation marketplaces.
Indeed, Klarna has already made 75 of its present and former employees millionaires through its in-house equity package scheme.
How Is Klarna Profitable?
Klarna was a profitable business for the first 14 years of its operations, but failed to break even during 2019 and 2020. This apparent downturn in its fortunes can be explained by the fact that the company has been reinvesting its capital quite aggressively recently, attempting to grow the business as its profile has become more well-known.
What’s especially pleasing about Klarna’s business model is that the company derives the vast majority of its revenue – over 98% – from interest and commission income.
The firm believes it will soon return to profitability, which, given the surging demand for the brand’s BNPL option, is pretty much a certainty at this point.
Is Klarna Worth Investing In?
Despite making a loss of $163 million last year, Klarna reported a 40% increase in its total net operating income at $1.1 billion, with its gross profit margin up over 90% from 2019 at 87.5%.
Klarna now boasts over 90 million customers across the globe, and has expanded its operations into nine new territories since the beginning of 2020. Furthermore, the company had been increasing its presence in the vitally important UK and US markets too, taking an 18% share of the American scene, somewhat behind rival Affirm’s 36% market share.
The general growth of e-commerce during the coronavirus pandemic was a major tailwind for companies such as Klarna, helping spur millions of customers to use a raft BNPL products, as shoppers flocked online during the extended lock-downs. The gradual reopening of the economy doesn’t appear to have blunted Klarna’s growth rate, and with current trends as they are, the future looks rosy for the company.
Klarna is attractively priced on a valuation basis, with an admirably low debt-to-equity ratio of 0.6x, which should ensure its path to profitability isn’t hampered by onerous debt repayments further down the line.
Investors should also note that Klarna’s star is on the rise right now; the company is the most downloaded “buy now, pay later” app in the UK, and accounts for the second largest BNPL provider in the US, with a 7.9 million user count in 2020.
Alternatives To Investing In Klarna
Block
Formerly known as Square, the fintech company Block is currently in the process of creating a fully-operating, stand alone payments ecosystem for its large and ever-growing number of merchants and consumers.
In fact, Block operates two unique ecosystems:
- The Square Seller platform, which enables sellers to start and maintain their businesses, with point-of-sale and payments solutions, as well as advanced functionality features including payroll services, virtual terminal and customer engagement applications; and
- Cash App, a mobile payment service that enables peer-to-peer money exchanges, including the capability to buy, sell and send Bitcoin without the need to have transactions verified on the crypto-currency’s own blockchain.
While both these offerings are generating revenue at lightning speed – Block’s sales are up 76% year-on-year, with $343 million of free cash flow made in just the last quarter – it is Block’s recent acquisition of Afterpay, the Australian BNPL business, that has really got investors excited.
Afterpay is one of the strongest brands in the BNPL space, and will bring with it millions of additional customers to Block’s various emerging ecosystems. Indeed, as of June 2021, Afterpay had more than 16.2 million active customers, as well as over 100k seller partnerships.
As Block’s share price has lost more than half its value the last three months, it looks like the present moment might be a good time to open a position in the business. But investors should still be wary; while Block’s prospects look good – especially after the Afterpay deal – potential shareholders should hang fire for the time being. Block’s forward P/E ratio is still high at 70x, and its gross profit margin of 24% is low for the sector as a whole.
Affirm
Affirm – a pure-play in the “buy now, pay later” industry – is one of the leading lights of the sector, having had the third largest user count in the US, while accounting for 78% of the entire BNPL market at the end of 2018. However, Affirm’s stock has failed to reflect its commanding position, having fallen 66% since November 2020, and now trading at levels lower than at its IPO this time last year.
The problem for Affirm appears to be that investors have lost faith in its ability to truly disrupt the traditional credit-lending businesses, not just in the face of legacy financial institutions, but also when it comes to other, powerful competitors in the fintech realm itself.
However, Affirm isn’t finished yet. The company recently closed on a deal with e-commerce giant Amazon, and the BNPL revolution is still in its early stages.
The firm is increasing its gross merchandise volume with its merchant base, seeing an 85% up-tick in average sales value when its product is offered at the point-of-sale.
Affirm’s comparable metrics for the next few quarters will be difficult, since the company had such a great growth period during the pandemic – but once things settle down, it will soon be clear just what kind of a massive opportunity this business has.
Paypal
Online payment processing doesn’t come much bigger than PayPal, whose 48% market share puts it miles ahead even of its nearest rival Stripe. So PYPL’s move into the BNPL sphere should be a concern for other firms, with its interest-free payments a sizeable plus point for consumers, as is the fact that merchants are paid upfront at the time of sale.
That said, it’s not clear how much of a threat PayPal’s own “buy now, pay later” product will actually be to other firms. Sure, it precludes competition when buyers use PayPal as a means of purchase, but the normalizing effect of making BNPL a common occurrence may indeed help speed-up the adoption of the short-term credit option for all shopping experiences.
As is the case with many fintech companies at the moment, PayPal’s shares have performed quite badly of late. It might have taken a little longer than most other businesses, but PYPL now trades at nearly half the price it did last July.
No doubt the pandemic tailwinds are blowing less strong these days, but the question for investors remains: does PayPal have even further to drop? Given that its earnings per share estimate has decreased more than 10% since the last quarter, it’s possible there’s more downside yet to come. The stock isn’t even cheap either, running at a trailing twelve month P/E multiple of almost 36x.
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