Looks Can Be Deceiving

The market remains turbulent, but there’s an interesting development on the horizon (no pun intended): the return of the IPO market.

The explosion of retail investment and fiscal stimulus in 2020 coincided with a rush of IPOs and SPACs. Many of these were consumer-facing businesses hoping to leverage brand familiarity and pandemic-fueled sales for a payday. While some have maintained momentum and kept Wall Street’s attention—like Airbnb—most have plummeted to depressing lows. Allbirds, Rent the Runway, Warby Parker, Oatly, Olaplex, and FuboTV all crashed and burned before our very eyes, bringing the IPO market down with them. As a result, a number of big names cancelled their public offerings in 2021 and 2022.

So this week, it’s worth discussing the latest IPO on everyone’s mind: Klarna (KLAR).

Most of you will have heard of Klarna, but if you haven’t, it is a payments company that allows shoppers to buy now and pay in instalments over the coming months. Over the last few years, it's seemingly everywhere, from JD Sports to Booking to HelloFresh. 

Its scale is impressive—Klarna boasts 93 million active users, works with 675,000 merchants across 26 countries, and facilitated $105 billion in gross merchandise volume in 2024. This translated into $2.8 billion in revenue and $21 million in net profit. Originally from Sweden, Klarna has expanded globally, but much of the attention will be on its U.S. operations, as that’s where the business has truly taken off. However, despite its broad reach, Klarna’s business model presents some challenges.

While Klarna may appear B2C, it’s actually B2B, making most of its revenue from merchant fees rather than interest on short-term loans. Its average order value (AOV) is just $100, with most consumers using its interest-free, four-installment plans. This focus helps spread lending risk across millions of users, but it also means Klarna constantly needs to attract new merchants and retain its biggest clients—the ones responsible for a disproportionate amount of transactions.

This is where the BNPL business gets tricky. It’s a race to the bottom, with competitors like Affirm, Afterpay, and legacy players like Apple and PayPal vying for market share. 

Take Walmart, for example—Klarna recently won a deal with them, snatching the business away from Affirm. Walmart accounted for 5% of Affirm’s GMV and 2% of its operating income. While details of the switch haven’t been disclosed, Klarna likely offered better terms. But what happens when another competitor undercuts them next year?

One of Klarna’s biggest bullish talking points—and a major reason it’s making headlines—is its full embrace of AI.

CEO Sebastian Siemiatkowski became enamoured with ChatGPT in 2022 and quickly partnered with OpenAI, making Klarna a guinea pig for AI-powered automation. He’s been one of the most vocal CEOs on AI’s impact, claiming that AI can replace nearly all human jobs. And he’s backing that up with action.

Klarna estimates that AI has already cut $10 million in marketing costs, sped up contract generation from an hour to 10 minutes, and, in the biggest headline-grabber, replaced 700 customer service agents with an AI chatbot that resolves cases nine times faster than humans.

This aggressive push into AI has turned Klarna into a thought leader in automation, setting it apart from its competitors. Siemiatkowski has even said that Klarna has essentially stopped hiring, reducing its workforce from 5,000 to under 4,000 and forecasting a further drop to 2,000 as AI adoption increases. This would be great for those pesky margins. 

However, some former employees suggest this is more of a PR exercise than a true AI revolution. There’s speculation that Siemiatkowski is using AI as a narrative to keep Klarna relevant ahead of its IPO and to frame layoffs as a strategic shift rather than downsizing.

Despite the hype, Klarna faces significant challenges.

BNPL is a highly competitive space with low margins, and Klarna’s creditworthiness assessments remain opaque, making it difficult for investors to gauge delinquency risk during economic downturns. A telling sign? In Sweden, 13% of Klarna transactions are for food—suggesting that, for some, BNPL is being used as a short-term stopgap for essential purchases. That’s a risky foundation for long-term stability.

Just look at competitor Affirm’s stock performance since going public:

• It fell 50% within its first four months.

• It then tripled over the next six months to hit an all-time high.

• From November 2021 to January 2023, it cratered 95%.

• Over the following two years, it skyrocketed ninefold, only to drop 40% again in the last month.

This kind of volatility is par for the course in BNPL, and Klarna is unlikely to be an exception.

At an expected IPO valuation of around $15 billion, Klarna would need to hit $150 billion to 10X—putting it just behind American Express in market cap. 

Could it happen? Sure. But I wouldn’t bet on it.

While Klarna is certainly executing a Blue Ocean Strategy in consumer lending, I’m sceptical. The BNPL space, in general, feels like a band-aid over deeper systemic issues in consumer finance. That makes me hesitant to be overly bullish.

For that reason, I’m happy to leave Klarna on the sidelines, particularly as it seems to be jumping into the market at an opportunistic time. While AI-driven efficiency gains are compelling, the business model’s fragility and the intense competition make it a tough sell. 

I’m happy to see the IPO market returning but for now, I’ll be turning towards more established pastures.