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Direct debit

25 February 2021 By Karen Kwok

Klarna’s march continues. The Swedish payments firm said on Thursday that annual revenue had jumped over a third to 11 billion Swedish crowns ($1.2 billion), relative to 2019. Even so, if a rumoured direct listing becomes reality, it could be a mixed blessing.

Private companies usually go public to get cash to grow, and to allow existing investors to turn some or all of their early backing into cash. Klarna probably doesn’t need growth capital – while it chose not to address the rumours, its next private funding round could bump its valuation up from $10.6 billion in September to $31 billion, Bloomberg reported on Tuesday. But a Spotify Technology-style direct listing, without the time and effort of an initial public offering, would allow backers like Silver Lake and Snoop Dogg and employees like boss Sebastian Siemiatkowski to coin it.

That’s the upside. The downside is that a daily traded share price would provide a running commentary on Klarna’s business model. Allowing institutional investors onto the register would ensure constant scrutiny.

Siemiatkowski might not mind that, given his “buy now, pay later” model is benefitting from a lockdown-driven online shopping boom. On the face of it, even a $31 billion valuation wouldn’t be excessive relative to U.S. rival Affirm and Australia’s Afterpay. Despite being 25 times 2020 sales, Klarna’s two payments peers have multiples more than double that.

Still, Klarna has more banking operations than they do, which warrant a less racy valuation. Top line growth up over a third is great, but Affirm and Afterpay’s revenue doubled, and the Swedish group also reported a deeper operating loss of 1.6 billion Swedish crowns ($197 million), compared to 1.08 billion Swedish crowns in 2019. The losses might continue as Klarna tries to fight for U.S. market share, where PayPal and other banks are muscling in. A $31 billion Klarna would also trade more in line with Afterpay’s multiple of just under 25 times on a price-to-book-equity basis.

Meanwhile, Klarna has well-documented regulatory risks. Britain’s Financial Conduct Authority has recently announced a crackdown on the sector, while the United States might follow suit if concerns grow that buy-now-pay-later encourages the taking on of debt, especially among young shoppers. Institutional investors focused on the “S” component of environmental, social and governance concerns might make their feelings known. That could make for a pretty volatile stock.


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