Billion Dollar Question: How Klarna Should Be Valued Upon Impending IPO

With notable improvements in its financial performance, Klarna's path toward an initial public offering (IPO) is gaining momentum. CEO Sebastian Siemiatkowski recently revealed the company's profitability, showcasing a pre-tax profit of $12 million in the third quarter, a significant turnaround from the previous year's $200 million loss. The positive trajectory is underlined by a nearly-halved bad debt reserve and a 30% year-over-year increase in revenue, propelled by Klarna's strategic push into the U.S. market.

While the company appears on track for an IPO, there are key considerations that may impact its valuation. Siemiatkowski secured $6.7 billion in funding last year, substantially below the anticipated $45.6 billion equity valuation for 2021. To bolster its value, Klarna must position itself not merely as a bank but as a financial technology powerhouse. This shift in perception is crucial for convincing public market investors to view Klarna through the lens of a fintech entity.

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Drawing a comparison with its U.S. counterpart, Affirm, Klarna's potential IPO valuation is estimated by extrapolating its fourth-quarter sales growth of 30% year-over-year. Applying Affirm's enterprise value-to-sales multiple of 6.2 for 2023, Klarna's implied valuation stands at $14 billion. However, this method might not be entirely accurate, given Klarna's unique financing model.

Unlike Affirm, Klarna relies on $8 billion in consumer deposits to fund its loans, resembling a traditional bank more than a capital-light fintech. The enterprise value calculation might not capture this distinction effectively, as Klarna's client money is deeply intertwined with its overall financial structure. A more relevant approach, in line with traditional lenders, involves evaluating Klarna's valuation based on book value.

As of June, Klarna boasted $2.1 billion in balance-sheet equity. If the company were valued at $14 billion, it would represent a valuation over seven times its book value—an ostensibly steep figure. Compared to other highly valued members of the Refinitiv Global Banks Index, like Brazilian Nu and Swedish Nordnet, which trade at 8 and 7 times book value, respectively, Klarna may find it hard to justify such a high price.

Siemiatkowski faces the formidable task of persuading investors that Klarna is fundamentally a lender, not a bank, to enhance its IPO valuation. While venture-capital supporters align with this perspective, the broader public market may raise concerns about Klarna's significant reliance on deposits. Balancing this perception is crucial for Siemiatkowski to navigate the path toward a successful IPO and secure a valuation that aligns with Klarna's evolution into a fintech force.