Klarna vs Affirm Stock: Which Is Best?

Klarna vs Affirm Stock: Elon Musk is best known for his electric car company, Tesla, which played a tremendous role in disrupting the auto industry. However, this isn’t Musk’s first time turning traditional business practices upside down. In 1998, Musk and his partners took on the financial services industry by introducing the digital payment platform PayPal.

PayPal’s success paved the way for a long list of digital payment providers, including Block’s Cash App, Venmo (acquired by PayPal in 2012), Apple Pay, Google Pay, and so on. Major financial institutions countered with a joint project, Zelle, which is scrambling to pull market share away from competing platforms.

Once it became clear that digital payments were here to stay, a variety of fintech companies followed with digital solutions for nearly everything else that large financial institutions offer.

For example, as of June 2022, the popular online brokerage platform Robinhood had 14 million users, mobile banker Chime had 14.5 million users, and AI-powered lender Upstart had originated nearly $29 billion in loans.

Now digital lending has gone one step further with a collection of Buy Now, Pay Later (BNPL) companies. Essentially, merchants partner with one of the platforms to offer customers short-term low-interest/no-interest loans so they can pay over time for their purchases. Examples include Affirm, Afterpay, Klarna, PayPal Pay in 4, Perpay, Sezzle, and Splitit.

The global BNPL market is growing rapidly, which means there is plenty of room for multiple BNPL companies. Two of the most popular, Affirm and Klarna, compete for the same customers. That makes investors curious – Klarna vs. Affirm stock: Which is best?

How Big Is The BNPL Market?

Buy Now, Pay Later isn’t a new concept. It has its roots in the Great Depression, when merchants started offering layaway programs for customers who didn’t have the cash to pay upfront.

Nearly a century later, customers don’t have to wait to take merchandise home with the modern BNPL system. Simple credit approval and low or no-interest terms make it easier than ever to spend – especially online.

Details of the global BNPL market and growth projections vary somewhat between analysts, but all agree that BNPL is a growth industry.

One research firm calculated the global BNPL market at $5.01 billion for 2021 and expects a compound annual growth rate (CAGR) of approximately 26 percent through 2030.

Another estimated global BNPL market size at $125.09 billion for 2021 and projects a CAGR of 43.8 percent through 2030.

In 2021, North America was responsible for roughly 30 percent of the BNPL market, and the Asia Pacific region was the fastest-growing. Younger buyers are particularly enthusiastic about this new payment option, as they are digital natives who are in their element with digital tools and services. Many use buy now, pay later to upgrade their tech devices, which wouldn’t otherwise fit into their budgets.

Who Are The Biggest Buy Now, Pay Later Companies?

Though new BNPL platforms are popping up regularly, three of the more established companies have enjoyed stand-out success. Privately-held Klarna, based in Sweden, is number one when measured by the number of retailers and consumers it serves.

Afterpay, which Block acquired in early 2022, is growing sales more quickly than its peers. The growth rate is expected to increase further as Block begins to integrate Afterpay with its existing products and partnerships.

Of the top three BNPL companies, Affirm stock is the only option for investors who want a pure BNPL option. But is Affirm stock a buy, or will competitors stifle Affirm’s continued growth?

Does Affirm Have A Moat?

Affirm was introduced on January 1, 2012, by another PayPal founder – Max Levchin. The concept was simple: Levchin wanted to make microloans available to consumers as an alternative to credit cards.

The BNPL option would do away with excessive interest and fees and reduce reliance on credit scores for lending decisions. That would ensure more borrowers had access to the funds they needed.

The concept caught on right away, and in less than a decade, Affirm was ready to go public. It held its IPO on January 13, 2021, and by the next day, Affirm stock had doubled in value. Investors saw Affirm as an opportunity to be a part of the BNPL market, which appears poised for substantial growth over the next ten years.

At the end of 2021, Affirm reported more than 11 million active customers and approximately 170 thousand active merchants. From July 2016 through December 2021, Affirm achieved $25 billion in gross merchandise volume, and it currently controls an estimated 50 percent of the North American market.

Affirm’s success is largely due to its wide network of merchant partners. Most merchants only deal with one BNPL provider, and Affirm is the platform of choice in the United States. Major retailer partners include Target, Walmart, and Amazon. In addition, Affirm is the BNPL provider for several travel industry brands, such as American Airlines.

These partnerships are the most critical element of Affirm’s moat. As long as the company maintains its merchant partnerships, other BNPL providers will struggle to chip away at Affirm’s market share.

Is that enough to make Affirm stock a buy? It’s a tough call. Share prices are down more than 70 percent year-to-date, and analysts are split. Half consider Affirm stock a buy based on projected growth in the global BNPL market and Affirm’s leadership position in the industry.

The other half prefer a wait-and-see approach and rated Affirm stock a hold. The concern is that competitors like Klarna will overshadow Affirm, preventing Affirm from recovering from the 2022 downturn in tech stocks.

Why Is Klarna’s Valuation So Low?

Klarna stock is not publicly traded, but that doesn’t mean the company is immune to economic conditions. Rising inflation and increasing interest rates have made things difficult for tech companies in general and BNPL platforms in particular.

Klarna was valued at $45.6 billion in June 2021, but in June 2022, that valuation dropped dramatically. As of June 2022, the company was valued at just $6.7 billion – a year-over-year drop of approximately 85 percent. That’s on par with others in the BNPL industry, illustrating that Klarna faces the same challenges as peers like Affirm.

However, Klarna has several challenges that are specific to its business. Investors learned that the company’s losses tripled year-over-year when Klarna reported financial results for the first half of 2022.

It is worth noting that these losses aren’t the typical growing pains of a new fintech. Klarna was profitable through 2019 – or until it started its North American expansion in earnest. Operating expenses went up quite a bit, largely due to Klarna’s efforts to expand its presence in the North American market.

Will the losses continue, or will Klarna return to profitability? It may come down to exactly how much market share it can pull away from Affirm. In the meantime, Affirm stock appears to be a reasonable choice for investors interested in the higher reward potential that comes with high-risk tech stocks.

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