It's been a lackluster year for the initial public offering (IPO) market. Although there have been some high-profile IPOs, like Figma, 2025 has been pretty quiet.
The market got another high-profile contender when buy-now, pay-later company Klarna (KLAR -3.76%) finally landed on the stock market this week. The financial giant's IPO had been highly anticipated for years, and it closed 15% higher than its IPO price of $40 on the first day of trading. Let's see what Klarna is all about and whether or not it's worth investing in right now.
More than buy now, pay later
Buy now, pay later has become a well-known phrase in shopping, but Klarna likes to think of its business as "flexible payment options." It does indeed offer buy now, pay later options, but it has a full banking license and offers credit cards as well, and part of its business is artificial intelligence-based data insights for customers and merchants.
There are several players in this field at this point. The other two large ones are Afterpay, which has been acquired by fintech company Block, and Affirm Holdings, and PayPal Holdings has its own services as well. All of these businesses are similar, but they do have some differentiated features, and they work with different merchant clients.
Image source: Getty Images.
Sweden-based Klarna has built up a long and impressive list of top brands that it partners with, including names like Disney, Macy's, Uber, and Adidas, and it just announced an agreement with Gap.
It works with 790,000 merchants globally, and it also partners with a large assortment of tech partners like Shopify, Adyen, and Stripe for easy integration into any payments system.
One of Klarna's main features is that it doesn't charge interest on small loans paid within 30 days. It does charge late fees, though, and it charges interest on larger purchases paid down over longer periods. Management also touts its AI-driven services that help customers manage their payments and budget, and it offers cashback on its credit cards. Klarna partnered with AI credit evaluation company Pagaya Technologies earlier this year to expand responsibly underwritten credit to more consumers.
Management sees its difference in its underwriting capabilities. Its average client balance over the trailing 12 months was $80, in contrast to $6,730 in credit card debt for the average U.S. customer, and its average loan duration was 40 days, which means it can quickly move as credit trends shift. Its provision for credit losses was 0.52% of gross merchandise volume (GMV) over the trailing 12 months, while loan losses as a share of total loans were 2.92% for commercial U.S. banks in 2024.
Driving innovation in finance
Klarna is already a large and prominent company, and as a result, it's not demonstrating the kind of mind-blowing growth that IPO investors often like to see. Revenue increased 19% year over year to $3 billion for the trailing 12 months ended June 30, and GMV was up 15% at $112 billion. It isn't profitable, and it reported a $225 million operating loss and a $100 million net loss.
It serves 111 million customers in its 26 global markets, including 26 million new customers from a recent acquisition. It expects to see meaningful growth from a recent deal with Walmart, and it's getting ready to launch new deals with Nexi, Worldpay, and JPMorgan Chase's J.P. Morgan Payments, which will add $5 trillion in total annual transaction volume.
Management sees a serviceable addressable market of $520 billion in payments revenue based on its take rate and the $19 trillion in consumer retail and travel spending over the trailing 12 months. That spending metric is expected to increase to $35 trillion by 2027, excluding China, which provides organic growth opportunities. It expects to launch in new markets, and it also generates advertising revenue from its merchant partners on its finance app. Ad revenue was $184 million for the trailing 12 months ended June 30. Finally, with its banking charter and spirit of innovation, it sees many ways to monetize its platform down the line.
Buy now or buy later?
Klarna is an exciting company with many long-term opportunities, but its stock is already falling from the first-day closing price. It has a $16 billion market cap and a price-to-sales ratio of 5, which isn't terribly expensive.
It isn't profitable, but it was for the first 14 years of operation. It's been taking a lot of capital to expand globally, which is hitting the bottom line. It's done this profitably before, which is a vote of confidence that it can do it again. At the same time, this bigger company is a different beast, and it takes a different set of skills to build to scale.
Klarna is a well-run company with a bright future, and it doesn't look expensive today. However, it still has a lot to prove as a public company. In general, it's prudent to watch and wait with IPO stocks.
