Klarna Earnings: Rapid Growth in Longer-Term Financing Spikes Provisions; Shares Attractive

Key Morningstar Metrics for Klarna Group

What We Thought of Klarna Group’s Earnings

Klarna KLAR reported a third-quarter adjusted operating loss of USD 14 million after provisions for credit losses doubled from the year-ago period. Revenue growth of 32% and gross merchandise volume growth of 29% were good.

Why it matters: Investors are looking for a pathway to profitability for Klarna while at the same time becoming cautious about the quality of unsecured consumer credit in the US and Europe. Shares took a nosedive on the jump in reported provisions and the resulting decline in transaction margin dollars.

• Klarna is expanding its longer-term financing options, expanding balances by 244% in the US and 139% globally. This growth comes at nearly twice the transaction margin of its group average, but accounting rules require Klarna to book provisions at loan origination, which drives short-term unit economics down.
• While provisions jumped from 55 basis points in the second quarter to 72 basis points of gross merchandise volume in the third quarter, the increase is entirely driven by IFRS 9 provision rules. Indeed, realized losses have been on a slow but steady decline since the beginning of the year.

The bottom line: We maintain our USD 45 per share fair value estimate and narrow moat rating. We believe that Klarna’s headline numbers fuel a narrative around deteriorating credit quality and an unproven business model, while underlying performance points in the opposite direction, making shares attractive.

• Cleaning results for the accounting treatment of stage 1 provisions, Klarna’s transaction margin dollars grew 25% year over year, in line with our full-year expectations.
• Guidance for the fourth quarter points to an acceleration in profitability as Klarna begins to capture interest income from its longer-term financing solution, which is causing short-term pain.