Klarna’s Q3 2023 results are the latest in a growing list of evidence that the Swedish fintech giant is evolving from a loss-making unicorn to a durable company ready for the public markets.
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It wasn’t that long ago that Klarna had its valuation slashed by around 85%. At the time, the repricing made its ascent seem a bit specious, putting a question mark on the company’s value.
How quickly things change. While Klarna’s numbers looked like standard unicorn fare in late 2022 (replete with unappetizing losses), the company managed to post stronger results as the year went along, masked somewhat by its full-year metrics.
That spate of good news continued this year, with the company reporting improving credit results and even a profitable month. And it seems that after laying off staff and working to control costs, the good-news train is still rolling along at the company.
Today, we’re diving deep into Klarna’s Q3 results with a focus on its return to profitability. If you care about buy now, pay later (BNPL) as a category, e-commerce, or even just fintech writ large, you need to understand how Klarna is performing. To work!
An improving story
In the third quarter, Klarna reported revenue of 6 billion Krona ($549.9 million), up about 30% from 4.6 billion Krona ($421.6 million) in the third quarter of 2022. The company also reported an operating result of 130 million Krona ($11.9 million), a massive improvement on the 2.12 billion Krona ($192.6 million) loss a year ago. (All currency conversions use current SEK-USD values.)
How did the company manage to both increase revenue and swing to profitability in just one year? Several efforts culminated in the improved numbers we see above:
- A better take rate: Klarna’s gross merchandise volume increased 22% to 242.8 billion Krona ($22.26 billion) from $199 billion ($18.23 billion) in Q3 2022. And its take rate (measured as revenue divided by GMV) ticked up to 2.47% in Q3 2023 from 2.31% a year ago. Greater GMV and a better take rate helped the company increase its revenue.
- Falling costs: Klarna’s “total operating expenses before credit losses” declined to 4.5 billion Krona ($412.4 million) in Q3 2023 from 4.8 billion Krona ($439.9 million) a year earlier. The company’s “adjusted operating expenses before credit losses” shrank to 4.1 billion Krona ($375.8 million) from 4.2 billion Krona ($384.9 million) a year ago.
- Lower credit losses: The company did well in the last quarter, with its credit losses narrowing to 800 million Krona ($73.3 million) from 1.5 billion Krona ($137.5 million) in Q3 last year.
All together: Better GMV, a higher take rate and solid revenue growth combined with lower costs and smaller credit losses meant that Klarna’s “cost to income ratio” narrowed to –83% in Q3 2023 from –116% in Q3 2022.
Boom, profits.
The numbers look even better if you allow for adjusted results: Adjusted operating results came in at 478 million Krona ($43.8 million) in the quarter compared to a loss of 1.56 billion Krona ($143 million) a year ago.
It’s a good idea to ask just how Klarna pulled this off. Most private companies tend to post huge losses in the name of growth, so it’s rare to see a company as large as Klarna increasing its revenue 30% and flipping into the black.
It appears the company’s own efforts to improve its situation played a part. Here’s how the company described its credit loss performance in Q3:
Our credit loss performance improved by 46% YoY, reflecting improvements in the precision and accuracy of our models. Credit losses as a % of GMV reduced 56% YoY, highlighting how Klarna continues to grow while making the right lending decisions for our consumers.
That scale of change in credit losses as a fraction of GMV in a single year is pretty bonkers. I am not sure if we should laud this set of results or see it as a condemnation of how it handled risk a year ago, but no matter: Klarna is now looking very solid.
Still, that’s only one part of its improving results. Better credit results don’t drive revenue; in fact, you could argue that more stringent credit rules could limit growth at a company like Klarna. (At the expense of profits, of course.)
There’s an important factor contributing to this streak of good results: Klarna’s bet on the United States is paying off. The company said its U.S. business “achieved its fourth consecutive quarter of profit, with GMV increasing 46% YoY” in the third quarter. That’s a lot of implied profitable growth, and given the relative strength of the U.S. economy compared to other regions, it is likely an important driver of Klarna’s current glow-up.
So what’s it worth?
As we are looking forward to an eventual Klarna IPO, we do care about its present value. During its last fundraise, Klarna was worth $6.7 billion. So if we annualize its Q3 2023 revenue, we get a figure around $2.2 billion. Klarna likely has a big holiday quarter underway at the moment, so our revenue figure is likely too small. Still, at our admittedly conservative run-rate revenue figure, the company is worth around 3x its current top line.
Is that a lot? A little? A look at the trailing price-sales multiples of major public fintech companies Block and PayPal gives us ratios of 1.42x and 2.16x, respectively. That said, Block’s revenue increased 16% in the third quarter (exclusive of bitcoin trading revenue), while PayPal’s net revenue rose 8% in the last year.
So, Klarna is growing its top line faster than either of these two companies and is not priced too far above them if you go by this metric. That allows us to wiggle the math a little and predict that if Klarna can maintain its current trajectory for a quarter or two, it should be able to defend its most recent private-market valuation even during a period of depressed fintech prices.
But, I hear you exclaim, “Affirm is a more direct comparable for Klarna,” and you’re right. It’s trading at 4.17x its trailing revenues, and it has enjoyed a nice valuation boost thanks to its recent partnership with Amazon. With more general fintech players in the 2x range and Affirm at 4x, Klarna feels priced neutrally at the moment.
If it posts a little more growth, I reckon we could start talking about an up-value IPO. Not bad for a company that underwent one of the most dramatic down rounds that we can recall. Consider Klarna proof that a single down round is hardly a death sentence.