Is This Market Good Enough?

Klarna's IPO Hesitation and the BNPL Market Valuation

The initial day of the Disrupt conference is proving quite hectic for TechCrunch. Consequently, detailed analyses regarding NFT trading volumes, recent marketplace valuations, and the benefits of rapid change for startups in identifying market opportunities will be postponed.

However, we can dedicate some time this morning to expressing a degree of disbelief, so let us proceed.

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Recent reports from CNBC indicate that Klarna’s CEO, Sebastian Siemiatkowski, is not particularly optimistic about current market conditions, and therefore isn't prioritizing an initial public offering for his company.

This perspective holds some validity, considering Klarna’s demonstrated capacity to secure substantial capital while remaining a private entity.

Why not continue this approach? The reality is that the company will eventually need to either become publicly traded or be acquired by a larger organization. Given previous acquisitions of BNPL businesses by companies like PayPal and Square, the pool of potential buyers for Klarna may be limited. Therefore, a public offering appears inevitable; the question is simply timing.

This context makes the following statement particularly noteworthy, as reported by CNBC:

We find this rather perplexing.

The public market for Buy Now, Pay Later (BNPL) companies currently appears quite robust.

Affirm, a publicly listed BNPL company in the United States, reported a gross merchandise volume of $2.5 billion and revenues of $261.8 million in Q2 2021 (Q4 fiscal 2021 for the company). These figures represented increases of 106% and 71%, respectively. Affirm also experienced a net loss of $128.2 million during the quarter and $430.9 million over its most recent fiscal year (ending June 30, 2021).

Affirm's Valuation

Despite these losses, Affirm currently boasts a market capitalization of approximately $29 billion, according to Yahoo Finance data. This equates to a revenue multiple of 28x for a BNPL company. This valuation is influenced by Affirm’s long-term partnership with Peloton and its recent collaboration with Amazon, which positively impacted its value.

Nevertheless, public investors are assessing Affirm as a software company, a market position that Klarna might find desirable for its own public debut.

It’s important to note that Klarna is achieving significant transaction volumes. The company’s gross merchandise volume reached $20 billion in Q2 2021, substantially higher than Affirm’s $2.5 billion during the same period. Furthermore, Klarna reported growing operating profit, with Net Operating Income reaching USD 766m compared to USD 466m in 2020 during the first half of both years.

While Klarna is valued at $45.6 billion, less than double Affirm’s current valuation, it is processing eight times the gross merchandise volume. Even applying a conservative multiple based on Affirm’s figures, Klarna could justify its private market valuation.

A Comparative Analysis

Consider the following calculations:

• Affirm annualized Q2 GMV run rate: $10.0 billion.
• Affirm GMV run-rate multiple: 2.93x (public market).
• Klarna annualized Q2 GMV run rate: $80 billion.
• Klarna GMV run-rate multiple: 0.57x (private market).

Does Klarna genuinely dislike these market conditions? Based on these figures, that seems counterintuitive. It appears that Klarna’s private market investors may have significantly undervalued the company in its latest funding round, even considering the Affirm-Amazon deal and Klarna’s slightly slower GMV growth in Q2 2021 (67% compared to Affirm’s 106%).

Indeed, even at one-third of Affirm’s current GMV multiple, Klarna’s valuation would approach $80 billion, exceeding the sub-$50 billion valuation it secured earlier this year.

The Concerns Behind the Hesitation

What, then, is driving Klarna’s reluctance to go public? Surprisingly, it may be related to Deliveroo. In the same CNBC interview, Klarna’s CEO expressed the following (emphasis added by TechCrunch):

To this, we simply respond: why not pursue a public listing in the United States? Telefonaktiebolaget LM Ericsson, a Swedish tech company trading on the Nasdaq as “ERIC,” serves as a relevant example, with a market capitalization in the tens of billions of dollars.

A U.S. listing for Klarna wouldn’t be unusual, given the company’s strategic focus on expansion within the U.S. market, as highlighted in its recent financial report, which dedicates its initial post-results section to its “U.S. focus.”

The United States isn’t the sole option for listing, and Affirm demonstrates that U.S. markets are currently receptive to BNPL companies.

Our assessment is that Klarna simply prefers to avoid going public, and attributing the hesitation to market volatility – despite a recent, minor stock market decline – provides a convenient excuse.

The Unicorn Gambit

This suggests Klarna is content to continue pursuing the “unicorn gambit,” betting that the historically strong valuations of technology companies will persist, ultimately rewarding firms that remain private longer with a more favorable valuation upon eventual listing.

The inherent risk of this strategy is the potential for valuation declines. A downturn in Affirm’s stock price could negatively impact Klarna’s valuation before it even files for an IPO, potentially making a public offering more challenging. However, this risk only materializes if Klarna delays its listing.

Concerns about “market chop” seem overstated, as stocks remain near record highs and investors continue to fund even unprofitable companies exhibiting strong growth. Ultimately, Klarna may simply be unwilling to go public. It would be more transparent if the company acknowledged that its private investors prefer to retain the opportunity for further upside rather than allowing public market investors to participate in valuation creation through an earlier listing.