Klarna Investment Research: Criticism of the “buy now, pay later” model is unwarranted, but will the IPO be successful?
Disclaimer: The contents of this report are not to be construed as investment advice. Historical performances are not a guarantee of future performance. The view of this author is his own and does not reflect the view of any current or past employer.
This report is the property of Elkebir Lamrani and was not written by AI.
Introduction:
Klarna is a leading global “Buy Now, Pay Later” (BNPL) financing provider. The BNPL scheme has emerged as a large disruptor in the retail transactions industry by offering more flexible solutions to consumers for their everyday purchases. While this concept isn’t new, Klarna has redefined its reach and relevance over the past two decades, evolving from a modest startup in Sweden to a major financial services company on the verge of an IPO.
Since announcing its intent to go public, Klarna has found itself under increased scrutiny. Skepticism arose of the BNPL model, especially in the light of rising costs of living, and later during the turmoil of the tariff policies. Klarna bore the brunt of the criticism, especially after it postponed the IPO from March to September 2025. This even spilled into social media, where the BNPL model was satirized with stories of customers “defaulting on a burrito”. And while tongue-in-cheek in nature, this metaphor does accurately highlight the increasing use of credit for small, everyday purchases.
The postponement of the IPO was in fact not driven by internal finances but rather to avoid the troubled and nervous investor market in March, and to wait for the dust to settle. While skepticism ahead of an IPO is commonplace, the type of criticism made so often about Klarna highlights a severe misunderstanding of the company’s business model and risk management policies. Even more so as other BNPL companies like Affirm have already led successful IPOs and maintained profitability since.
Thus, by analyzing Klarna’s business model, risk management framework, financial health and valuation insights, this research article will seek to clarify Klarna’s value proposition and attempt to argue that, despite the noise, there are compelling reasons for investor optimism.
1. The Business Model:
Klarna was founded in Sweden 20 year ago, and while its business model has seen tweaks, in its core it is still the same.
But “Buy-now, Pay-later” in itself is not a business model, rather, it’s the platform upon which the business is developed.
How does Klarna make money?
At every transaction, whether online or in-store, Klarna takes home a small percentage (roughly ~2.8%) of the total merchandise value, deducted from the merchant’s income. This is referred to as Merchant Revenue, and the percentage is directly negotiated with each merchant. Klarna also can charge fees to advertise merchants on its own network. Lastly, the other sources of revenue are more directly related to consumers and involve services, interest, and flexible repayment solutions.
The table below shows the four main sources of income:
¹ - 7% includes gain from divestments of KCO, thereby inflating the value.
2. Klarna’s Risk Management Framework:
Recent criticism has questioned the company’s financial viability in a scenario where many customers would be unable (or simply refuse to) pay the company back for their purchases. This is referred to as a default, which falls within the broader umbrella of credit risk. To address the validity of the criticism, it’s necessary to assess the company’s risk-management policies:
Excerpt from the latest annual report: “Klarna makes real-time underwriting decisions for each transaction, leveraging its records, including the customer’s history with Klarna and purchase behavior from active Klarna consumers, merchant data, credit reports and open banking data to understand the financial position of the consumer at that point in time.”
This practice is the bedrock of Klarna’s risk management framework: on top of real-time credit assessments and AI-powered underwriting tools, repetitive usage of the services creates a customer history. All of these inputs are continuously run and generate a maximum allowed value that the customer can claim under the BNPL scheme.
But the feature that makes this risk-management framework truly viable is very simple: Klarna only pays for merchandise of relatively small value. Indeed, on average, a consumer will be using Klarna for 120$ worth of merchandise per year. The significance is in four ways:
A default by a first-time customer (therefore with no Klarna usage history) will cause virtually no harm to the company’s bottom line. And this is assuming that the real-time credit checks clear them in the first place.
Should the above happen, the customer will not be allowed to use the service again later, therefore reducing future delinquency rates.
The values owed are small enough that they offer little motivation for a customer to damage their credit history.
The interest caused by delayed payments will also be of very small value and will not deter customers who are waiting for their next paycheck before repaying Klarna.
Due to these policies, the default risk is not significant. And the results can be seen: losses (we’re using credit loss provisions as a proxy) amount to only 0.56% of the total Gross Merchandise Value purchases.
It is worth noting, however, that these provisions do still amount to 18-21% of revenue and do bring down profit margins significantly. This will likely ease up in the next few years. In the US for example, we see a net decrease in both charge-offs (defaults) and in the overall delinquency rates over 60 days.
Source: Klarna IR Website
Source: Klarna IR Website
A question mark should be raised however, at the differences between provisions and charge-offs (i.e: how much Klarna expects to lose vs. how much they actually lose), which is a good way to assess the company’s ability to forecast losses. It is hard to accurately estimate as the PCL are given as a global average while charge-offs are given for the US only but one can interpret a slight imbalance, with the charge-offs slightly higher than the PCL. If that is the case, then it is likely that they are underestimating risk and that this will weigh on their profitability aspirations. However, with declining delinquency rates, this should not bear much downside impact.
3. Industry, Competitors and Strategy:
The BNPL sector has seen a veritable boom in recent years, piggybacking the e-commerce boom, and supported by easier access to bank accounts and smartphones for lower-earning teens and young adults. The flexible credit option is attractive, making the market size of BNPL on course to reach $910 billion by the end of the decade, effectively giving it a 10.2% compounded annual growth rate (CAGR).
E-commerce is driving the rapid growth in western Europe and could spill into the wealthier eastern European nations, but increased scrutiny and regulations could hamper the process. At the moment, the companies in these sphere are benefiting from “grey-area” regulations, allowing them a lighter burden of scrutiny than for banks or card companies.
Another potential source of risk is the big banks themselves wanting a piece of the pie, and seeking this opportunity to develop their own BNPL schemes. This isn’t hard to imagine, given their experience, existing relations with big merchants, consumer patterns data library, ability to withstand early losses, and overall credit trustworthiness. However, the size of that market would be constrained to customers with an existing account with the bank; bridging the head-start of existing players would also require large marketing and merchant outreach costs.
This brings us to assessing the current players in that sphere. In particular Klarna’s most direct competitor: Affirm.
Affirm is widely considered to be Klarna’s main competitor as they serve similar markets and are both seen as “BNPL-focused, disruptors of traditional credit methods”. Affirm is already publicly listed on NASDAQ and has in-part stolen the spotlights from Klarna’s IPO party by posting its first quarter of positive GAAP net-income (something Klarna has yet to do) earlier this week.
On the surface, the companies look similar, but they have significantly different objectives: Klarna sees itself becoming an entire shopping ecosystem, while Affirm sees itself only as a financing service.
Klarna’s strategy:
Focuses on quantity, rapid upscaling and vertical integration (beyond just financing but also market interface, customer service and card business).
Acquisitions of PriceRunner (well-established price comparison platform), Stocard (leading mobile-wallet app), and APPRL (influencer connector app) illustrate just that. PriceRunner’s integration, despite its hefty $1 billion price, offers a significant market-share advantage among low-budget audiences.
Superior use of AI (more than 60% of the customer requests on its website are resolved by AI chatbots) creates potential for lower operating costs.
Results:
5x more active customers than Affirm ✓
More brand recognition, especially in Europe ✓
Higher negotiating power with merchants ✓
High potential for advertisement income ✓
Business is still not profitable due to major expenditures to expand, and less streamlined underwriting ✗
Affirm’s Strategy:
Focuses on quality over quantity and offering more flexible payment options to clients.
Seeking exclusive partnerships with major retailers like Walmart, Amazon, Shopify.
Seeking best-in-class underwriting technology.
Acquisition of Returnly grants ability to return merchandise in-app and get instant credit.
Results:
Better underwriting leads to smaller losses of 5% of revenue, compared to 18% for Klarna ✓
Higher volume of loan transactions with banks increases revenues ✓
Already reached GAAP profitability and is valued higher than Klarna ✓
Weakness: limited growth, large key-man risk from partnerships with large retailers ✗
4. Financial Overview and IPO Valuation Commentary:
a. 2025Q2 Results:
Klarna released its Q2 results last month: revenues rose 22% YoY but operating losses and net losses rose by 119% and 195%, respectively. A large part of these losses (as for Q1) are due to restructuring and share-based payments. A positive adjusted operating margin is a good sign, especially as all costs have decreased relative to revenue except for higher provisions for credit losses (PCL). The increase in PCL is likely a precaution given the uncertainty of the Trump tariff policies on consumers. The CEO has confirmed that that it does not indicate an increase in actual defaults, saying it “does not mean more people are unable to pay us back. In fact, the opposite is true—Klarna’s delinquency rates continue to fall”.
b. Last 3 years:
The company has undergone massive restructuring with the aim to cut down on unnecessary expenses and aim for its first positive quarter. The effect is a clear decrease in operating costs over the past three years.
Processing, servicing, and operations costs have greatly diminished mainly due to the onboarding of AI and AI chatbots to assist clients.
Sales and marketing costs have decreased due to the knock-on effect of vertical acquisitions, integrations and successful market penetration through partnerships, reducing the need for marketing spend.
Consumer credit losses diminished due to better risk management policies, including enhanced underwriting algorithms and enhanced real-time credit-checks. This area still has the most potential to dramatically improve profitability.
Over a 3-year span the only costs which have increased are funding costs but these have increased throughout the market and are in-part due to globally higher interest rate environments.
Overall, costs are still marginally higher than competitors, especially Paypal and Affirm but Klarna’s vertical integration efforts give it a higher potential for profitability.
c. Capital Solvency:
The company’s insolvency metrics are healthy, and the risk profile has improved since last year, with an increase in capital solvency and a decrease in leverage:
CET1 Ratio: 15.1%, +20bps YoY
Total Capital Ratio: 19,6%, +10bps YoY
Leverage ratio: 7.4%, -125bps YoY
NSFR: 204.3%, -10.8% YoY
d. IPO Commentary:
The IPO prospectus was filed with the SEC and the shares are expected to go public on September 10th, under the ticker “KLAR”. The valuation quoted is around $13-14 billion. This is a quite modest valuation compared to Affirm and compared to Klarna’s own valuation in 2021 during the funding round (although higher than its 2022 valuation). This likely reflect more maturity in the investors’ outlook for the BNPL industry; higher interest rates; and more doubt about how fast Klarna can reach profitability. We believe this valuation to be quite low, not taking into considerations the stable platform now created by Klarna to propel it into future, sustainable profitability. Affirm’s much higher valuation does not make sense, given Klarna’s five times greater GMV.
EV/Revenue multiples of competitors:
Multiples taken from Finviz. EV/EBITDA not utilized due to projected negative annual EBITDA.
2025H1 Revenue is up 15% YoY. Our estimates put the annual revenue at 17-22%, driven by smaller provisions for credit losses and lower costs in the second half of 2025. Resulting in 2025E Revenue of $3.13 - $3.43 billion. Converting to enterprise value, adding net cash ($4.8 billion) and the quoted $200 million proceeds from the IPO, we reach an equity value of $25.6 - $27.6 billion.
Based on our multiples, we believe the IPO valuation to likely be low. Our belief is further bolstered by the recent rumors of the IPO being massively oversubscribed.
5. Conclusion
Based on our assessments of Klarna’s business model, risk management policy, comparative strengths and financial profile, we believe that the IPO valuation is likely undervalued. In particular, we believe that investors are not taking into account the upside potential created by the firm through its vertical integration and the brand it has now established. The company’s board showed it will not shy away from cutting down on headcount to achieve profitability, something which we believe is a question of “when” rather than “if”, especially as delinquencies continue to diminish. An important catalyst which will unlock deep value from this is the ability for Klarna to improve its underwriting ability. Key risks to the industry include the entry of large banks into the BNPL scheme.
Disclaimer: The contents of this report are not to be construed as investment advice. Historical performances are not a guarantee of future performance. The view of this author is his own and does not reflect the view of any current or past employer.
