Klarna

Investment Idea Details

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About the company

Klarna is one of the major payment systems of the next generation. The company has launched a platform that has become a full-fledged alternative to banks for both retail customers and business owners. The company was founded in 2005 in Sweden. Klarna is used by more than 85 million private customers and 200 thousand major online stores: H&M, IKEA, Expedia Group, Samsung, ASOS, Peloton, Abercrombie & Fitch, Nike, AliExpress and others.

Klarna was initially created as a platform for online shopping on credit. The Klarna system is integrated into an online store, finances customers' purchases (often with a zero interest rate), and receives payment from the seller's gross profit. Now Klarna has turned into a full-fledged digital wallet providing a wide range of services that include transfers, loans, brokerage services and savings management.

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Risks

If Klarna is unable to attract additional consumers and retain relationships with existing consumers and partners, it would adversely affect the company's performance.

Klarna operates in a highly competitive industry. Similar companies include Affirm, PayPal, Visa, Mastercard, and Square. If Klarna is unable to compete, it will adversely affect the company's results and future prospects.

There is a chance that after the lockup period (6 months after the IPO) we’ll need much time to transfer Klarna shares to our brokerage account. The process usually takes two weeks, however, delays are possible due to some legal procedures that are hard to foresee in terms of their duration.

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Market Opportunities

According to eMarketer data, the global online sales market reached $3.4 trillion in 2019. The market is expected to grow to $5.8 trillion by 2023. All stages of the commercial process are moving to the Internet - millennials and Generation Z are making more and more online purchases. However, e-commerce still accounts for only 14% of total retail sales.

Customers are increasingly choosing innovative payment solutions instead of traditional credit payment methods. According to the Worldpay Global Payments Report 2020, "buy now, pay later" is the fastest-growing online payment preference globally. In North America alone, the "buy now, pay later" market share is expected to grow 3-fold to account for 3% of all e-commerce payments by 2023.

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Financials and Valuation

Klarna has raised $3.1 billion from 45 venture capital investors, including Sequoia Capital, DST Global, General Atlantic, Blackrock, Visa and others. The last investment round took place in March 2021. The company raised $1 billion at a valuation of $31 billion.

Klarna shares are worth $1 606 on the OTC market, which corresponds to a valuation of $40 billion. This company can be compared to Affirm (AFRM). Affirm went public in early 2021 and is now trading at P/S of 29x. The market capitalization of the company is $18 billion.

Klarna's revenue in 2020 was $1.3 billion, and the company grows by an average of 40% annually. The company's gross margin is at a high level of 70%. The main driver is the growth of revenue and margins in new regions (USA, UK and others). The projected equity value of Klarna on the public market will be $65-75 billion after an IPO. The expected date of listing on the exchange is late 2021 - early 2022. Given the rapid market growth and Klarna's financials, the expected return on investment is 70%.

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