Klarna’s announcement that its long-expected funding round has come to a close brought with it one of the steepest valuation resets in memory, at least as far as operating businesses are concerned. Now worth $6.7 billion after raising $800 million, the European BNPL provider is worth a fraction of its self just last year, though the new war chest means the company is now well-fueled to execute its business plan.
The movement of Klarna’s price has been something to behold. Coming into 2022 worth more than $46 billion, prices for the company’s next funding round were reportedly initially around the $50 billion mark. That became something around $30 billion, then $15 billion, then $10 billion. Klarna’s final price cut feels punitive. But is it really? And now that Klarna has seen its valuation come down so very sharply, is Affirm — a U.S.-based, publicly listed rival in the buy now, pay later (BNPL) space — cheap?
Let’s do some math and find out.
Klarna versus Affirm: A lesson in fintech valuations
According to YCharts data, the value of Affirm crossed the $47 billion mark in Q4 of last year, months after Klarna itself raised at a price just south of $46 billion. For the BNPL space, the leading public and private entities in the market were riding high — perhaps helping engender enough concern and FOMO that Block paid a rich price for BNPL player Afterpay last August.
Then the revaluation of technology companies bit, and Affirm’s valuation fell to about $6.1 billion, with the company losing more than 9% of its value today, as of the time of writing. Once nearly united in valuation at their peak, the two best-known BNPL companies are now within spitting distance yet again.
So which is the better deal: Affirm or Klarna?
Pulling from our prior work, here’s the data that we need:
This May, Affirm reported GMV of $3.9 billion in calendar Q1 2022 (fiscal Q3 2022), up 73% from a year ago, and a 54% rise in revenues to $354.8 million. Toftal revenue minus transaction costs rose 37% to $182.4 million, and operating loss widened 8.2% to $226.6 million from a year ago. […]
How does Klarna’s Q1 look in comparison? Here are the numbers:
- Q1 2022 GMV: $20 billion, up 19% on a year-on-year basis.
- Q1 2022 “net operating income” (a revenue figure): $352 million, up 20% on a year-on-year basis.
It’s easy to do the math from here to get some comparative figures:
- Worth $6.1 billion, Affirm is worth 0.39x its annualized GMV run rate, 4.3x its annualized revenue run rate, and 8.4x its annualized revenue-less-transaction-costs run rate.
- Worth $6.7 billion, Klarna is worth 0.084x its annualized run rate, or about 8.4%, and 4.8x its annualized net operating income.
In terms of GMV multiples, then, the two companies are far from in sync with one another. If it is the case that net operating income at Klarna is loosely equivalent to non-adjusted revenue at Affirm, the two companies are at near parity, at least in valuation terms. It’s not as easy as you would think to compare the two numbers, but let’s try regardless:
- Revenue at Affirm: Network revenue plus interest income, gains on loan sales, and loan servicing income.
- Revenue less transaction costs at Affirm: The above, minus “loss[es] on loan purchase commitment, provision for credit losses, funding costs and processing and servicing,” pulling from an investor supplement.
In contrast, here’s what revenue looks like at Klarna, a company domiciled not in the United States:
- Net operating income at Klarna: Interest income less interest costs, plus commission income less commission expenses, with the “new result from financial transactions” and “other” operating income added in (subtracted when negative).
Affirm deducts credit losses in its smaller revenue figure, while Klarna deducts those after its net operating income result. As such, it’s likely best to compare Affirm’s revenue multiple to Klarna’s net operating income multiple. Perfect? No, but close enough.
Given that, we can say that Affirm may be a bit cheaper than Klarna, with a smaller multiple when we stack the two companies next to one another — 4.3x annualized most-recent-quarter revenue for Affirm, and 4.8x Klarna’s annualized net operating income.
So why the huge differential in GMV multiples, if their revenue multiples are essentially in sync? Our initial perspective that Klarna’s GMV multiple is smaller than Affirm’s due to a lower take rate holds in the above math; it makes sense that Klarna’s GMV multiple is lower, as its take rate is less than a fourth of Affirm’s..
Returning to the question in our headline: No, Affirm is not cheap compared to Klarna, not really. What the two companies really are is cheap compared to their prior selves, brought low by the retreat of the same forces that drove them higher.
Now in something like pricing parity, we have seen the late-stage startup market correct all the way down to the value of public comps. For unicorns hoping to avoid the vicissitudes of a changing share price, it seems that the only way to do so is to not get too big. And as startups want the very opposite, it may behoove them to bite the bullet and go public. After all, waiting does not appear to have done Klarna any favors.