Buy now, fray later

Klarna is twice the company it was. A year ago, a funding round valued the Swedish provider of so-called “buy now, pay later” services at $5.5 billion. After a new $650 million cash injection backed by U.S. buyout group Silver Lake that makes it Europe’s biggest financial technology unicorn, the valuation has jumped to $10.7 billion. That looks a stretch.

It’s easy to see why Klarna is on the up. Investors as diverse as rapper Snoop Dogg, BlackRock and Ant are into a model that allows customers to receive online goods upfront and pay via interest-free instalments. Retailers pay Klarna a cut of purchases.

A pandemic-related boost to online shopping has helped. More than 35,000 retailers have raced to partner with Klarna since the start of the year. Revenue rose 37% year-on-year in the six months to June to $470 million. Afterpay, a Sydney-listed rival, has seen shares rise over 700% since March, and revenue could rise by 73% in 2021, Refinitiv estimates show.

On the face of it, Klarna’s new valuation doesn’t look inflated. Afterpay’s $14.7 billion market capitalisation is around 13 times the $1.1 billion book equity Refinitiv forecasts it to have in 2021. Apply the same multiple to Klarna’s $1 billion book value prior to the latest investment and it would be comfortably more than the level Silver Lake just assigned.

Still, UBS analysts think Afterpay is only worth 4.8 times next year’s book value. On that basis, Klarna would be worth only $8.2 billion after factoring in the latest equity injection. Of course, by the end of 2021 the Swedish group could well have increased its book value to grow into its newly ascribed valuation. But that will be harder if it keeps making net losses like the $60 million one in the first half.

Klarna is planning a U.S. initial public offering, but further risks lie ahead. Government cash handouts to millions of U.S. citizens to boost spending will not last forever, and a recession will dent growth. Competition is getting intense as payment giants like PayPal start to muscle in. And Britain’s Advertising Standards Authority started a probe this month into whether the marketing of “buy now, pay later” services encourages reckless spending by young people. In other words, Klarna’s valuation momentum may not be all one way.