Klarna’s IPO Should Provide a Great Opportunity for Investors

Key Takeaways

• Klarna stock rose 15% in its first day of trading, finishing near our fair value estimate of $45 per share.
• We believe Klarna has a narrow economic moat, based on network effects and structural advantages of buy now, pay later—pure players versus card-rail-based BNPL providers.
• We expect a step change in gross merchant volume growth as a result of its new payment service provider agreements, which will allow Klarna to upsell its conversion and customer acquisition funnel tools to merchants, driving the BNPL provider to profitability

In its second attempt, Klarna KLAR has gone public. We think investors should take a close look at the new addition to the New York Stock Exchange and consider purchasing shares if they can. We value Klarna stock at $45 per share. Klarna stock finished its first day of trading at $45.82, a gain of roughly 15% from its IPO price.

Klarna has done its homework before the IPO. It has recently signed multiple agreements with payment services providers, which will significantly broaden its reach as a payment method this year and in the years to come. We believe the offer price of $40 per share does not adequately reflect the significant growth increase we anticipate from these agreements. Growth is what it is all about for Klarna. Its platform is just breaking even, starting to eke out a marginal operating profit, but as its platform ramps up further and its underwriting models are fed more data on shopper behaviors, we think Klarna will turn itself into a profitable staple among financial tech firms globally.

We Think Klarna Has a Narrow Moat

Klarna has amassed a substantial number of merchants and customers on its platform, which reinforces Klarna’s competitive positioning and ultimately enables it to extract economic profits in the future. We also see structural advantages in the way its business model is set up, making it difficult for other financial institutions to compete with Klarna on unit economics of unsecured credit at checkout.

Klarna has a two-sided network effect. As more active customers use the platform, more merchants will want to offer it at checkout. As more merchants offer Klarna’s payment method and financing options at checkout, more customers will start signing up for Klarna.

Additionally, merchants within verticals show tendencies to focus on similar payment methods at checkout. The thinking is that a merchant does not want to lose a sale because of a different choice in payment options. As a result, BNPL providers can gain prominence in specific verticals because they entered these verticals early and focused their marketing and product development spending on serving merchants and customers best in that vertical.

Customers also benefit from more customers joining Klarna, as the availability of Klarna at checkout improves (merchant-driven). Moreover, Klarna’s underwriting models improve as more customers join, resulting in increased spending limits and improved financing conditions for borrowers (for example, Klarna offering Pay in 30 days rather than Pay in 4).

Klarna is connected to over 760,000 merchants and has 111 million active customers. We believe that this is in the same order of magnitude as some of the largest card-issuing banks globally, making it hard for merchants to disregard Klarna as a payment option at checkout.