The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Karen Kwok

LONDON, March 17 (Reuters Breakingviews) - On the face of it, Klarna’s initial public offering looks an easy sell. The Swedish buy now, pay later group’s IPO prospectus, unveiled on Friday, shows a business that grew revenue by 24% last year and is now making a net profit. On Monday CEO Sebastian Siemiatkowski followed that up with what he described as a “game changer” of a deal with U.S. retail giant Walmart WMT.N to offer his company’s loans in-store. Even so, when it comes to its listing price Klarna should exercise caution.

The company, which offers zero-interest ways for consumers to split their shopping bills into instalments, makes money mostly from charging retailers and businesses for the resulting bumps to their top lines. Founded in 2005, Klarna became a hit during the pandemic but was hurt by the ensuing tech rout. In 2021, it raised funds at a $45.6 billion valuation, but that had plunged 85% to $6.7 billion by the time of a funding round the following year.

Given Klarna lost a total of $1.3 billion in 2022 and 2023, the $21 million of net profit disclosed in Friday’s filing represents good news. But it would have been a loss without the one-off proceeds from offloading Klarna Checkout. Meanwhile, nabbing the exclusive right to provide pay-later loans to Walmart’s 255 million weekly customers from U.S. rival Affirm AFRM.O could drive Klarna’s revenue growth. But in the six months to the end of 2024, Walmart represented only 5% of Affirm’s gross merchandise volume, a term for the total amount of transactions it processed. And the partnership didn’t significantly contribute to group profitability, an Affirm spokesperson told Breakingviews.

Affirm, which is looking to turn a profit in 2025, may seem like the obvious comparable. At the group’s multiple of 7 times 2024 revenue Klarna would be worth $20 billion, given the latter’s $2.8 billion of sales. Yet last year Affirm’s 46% top line growth was nearly double the Swedish group’s 24%. Blend in the multiples of slower growing pay-later and payment rivals PayPal PYPL.O and Block XYZ.N, who both trade at just above 2 times sales, and Klarna would fetch $11 billion.

Siemiatkowski could juice this up by arguing that his outfit is like payments companies Shopify SHOP.TO or Adyen ADYEN.AS, which trade at an average 19 times 2024 revenue. But with funding costs and credit losses making up 36% of its revenue, Klarna looks more bank-like than them. And even if there’s a Walmart effect, it would be limited to the third of its sales that came from the U.S. in 2024.

Fundamentally, Klarna is trying to list in a tricky IPO market, rife with uncertainty. Siemiatkowski is entitled to think ambitiously. But if he wants to ensure everything goes smoothly, he shouldn’t be thinking of an equity value far beyond $10 billion.

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CONTEXT NEWS

Swedish fintech company Klarna on March 14 filed its paperwork for a stock market debut in the United States.

The buy now, pay later company did not disclose the size of its proposed offering. It reported a 24% surge in 2024 revenue to $2.81 billion in the year ended December 31. It also earned $21 million in net income in 2024, compared with a loss of $244 million a year ago.

Klarna on March 17 announced a partnership with OnePay, the consumer fintech backed by Walmart and Ribbit Capital, to exclusively power installment loans for purchases at Walmart in the U.S. The group said its agreement would give Walmart’s millions of weekly U.S. shoppers the option of using OnePay to pay for their purchases over time.

(Editing by George Hay and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on KWOK/karen.kwok@thomsonreuters.com))