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Investors in buy now, pay later companies are channelling Jerry Maguirehowling “show me the money!” at management teams. Sebastian Siemiatkowski, co-founder and chief executive of Swedish BNPL group Klarna, is listening. Results this week highlighted a rush to rip out costs and get profits up as the company prepares to go public.
Klarna has suffered the same fate as others in the fintech sector. Rising interest rates took the shine off fast growing business models as the focus inevitably shifted to profits. Worth $46bn in 2021, Klarna’s valuation fell to $6.7bn just a year later. It has been working hard to get that number up. Second-quarter net losses were just SKr10mn. That should put the group in better stead when it presses the button on an initial public offering, with a valuation goal of $20bn.
Headcount reductions are getting costs down — more than 5,000 employees have become just 3,800 in the past year. Siemiatkowski thinks the figure can go as low as 2,000. Losses do not appear to be hitting growth. Revenues of $1.3bn in the first half were still more than a quarter higher than last year. Assume that Siemiatkowski is right about headcount levels, then operating margins would have been around 15 per cent in the first half, Lex estimates.
That should make Klarna an appealing proposition to any potential public market investors, especially given that rival BNPL Affirm is not expected to generate positive earnings per share until 2028, according to analyst estimates on Visible Alpha. Australia’s Zip is expected to make a small net profit this year.
Both companies trade on an enterprise value to forward revenue multiple of about five times, pretty much the top of the range for listed fintechs. A similar multiple would get Klarna close to its $20bn target. On the current growth path, revenues will easily push through $4bn by 2026 — from which Klarna should be able to extract a decent profit.
There are still plenty of reasons to be cautious. The first is competition, which is heating up. Klarna’s take rate — how much it makes from each transaction — is still rising for now. Bad credit is another. Losses remain very low but the model at today’s scale remains untested in an economic downturn. Then there are regulators who are tightening the screws on BNPL standards globally. The money is not in the bank just yet.