Klarna is cutting its costs in the good books of investors

Unlock Editor’s Digest for free

FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.

Investors in buy now pay later companies are being funneled Jerry Maguireyelling “Show me the money!” to the management teams. Sebastian Siemiatkowski, co-founder and chief executive of Swedish group BNPL Klarna, is listening. This week’s results highlighted a rush to cut costs and boost profits as the company prepares to go public.

Klarna suffered the same fate as others in the fintech sector. Rising interest rates took the shine off fast-growing business models as the focus inevitably shifted to profit. Worth $46 billion in 2021, Klarna’s valuation dropped to $6.7 billion just a year later. Hard work has been done to increase this number. Net losses in the second quarter were only SKr 10 million. That should put the group in a better position when it pushes the button on an initial public offering, with a target valuation of $20 billion.

Redundancies reduce costs – more than 5,000 employees have become just 3,800 in the past year. Siemiatkowski believes the figure may be as high as 2,000. Losses do not seem to affect growth. Revenue of $1.3 billion in the first half of the year was still more than a quarter higher than last year. Assuming Siemiatkowski is right about staffing levels, then operating margins would have been around 15% in the first half, Lex estimates.

That should make Klarna an attractive proposition for any potential public market investor, especially given that rival BNPL Affirm is not expected to turn positive earnings per share until 2028, according to analyst estimates for Visible Alpha. Australia’s Zip is expected to make a small net profit this year.

Both companies trade on enterprise value to forward earnings multiples of around five times, near the top of the range for listed fintechs. A similar multiple would bring Klarna closer to its $20 billion target. On the current growth path, revenues will easily exceed $4 billion by 2026 – from which Klarna should be able to make a decent profit.

There are still plenty of reasons to be cautious. The first is competition, which is heating up. Klarna’s take rate – how much it earns from each transaction – is still growing at the moment. Bad credit is another. Losses remain very low, but the model at its current scale remains untested in an economic downturn. Then there are regulators tightening the screws on BNPL standards globally. The money is not in the bank yet.

[email protected]