Klarna – WeWork replay pt. II

Klarna accepts reality.

• Klarna is raising $600m at $6.5bn in another clear example of the agonising problems that occur when one needs to raise money in a downturn when one has previously had a ludicrous valuation.
• The problem that Klarna faces is that it has to have the money meaning that it has no other choice but to accept whatever the market is prepared to give it.
• In this climate and with one of its peers (Affirm) down around 90% from its high, it is clear that whatever reasons the management and its advisors came up with to justify a valuation at $25bn and again at $15bn did not wash with investors.
• After being rebuffed twice by the market Klarna had no choice but to cut the valuation yet again resulting in the current price of $6.5bn.
• I had previously estimated (see here) that a fair price for Klarna would be around 2.0x EV/Sales and this looks like where it has roughly ended up.
• This puts Klarna close to the value end of the technology sector although its inability to make profits on what is likely to be $3bn of sales in 2022 is of concern.
• Klarna is also trying to raise as little money as possible as it has reduced its workforce by 10% so it needs less cash as the cost of cash in equity terms has increased by 10x.
• The other concern is that Apple is coming into its sector with its buy-now-pay-later (BNPL) service that it will fund from its own gigantic balance sheet.
• Critically, Apple will also do this at a 0% interest rate, which will put massive pressure on the sector’s ability to charge interest and make a good return.
• Apple has a habit of entering into segments occupied by its developers and making life very difficult for them causing many of them to exit.
• However, I suspect that both Affirm and Klarna are already big enough to survive this incursion but what it will do to their financial performance remains to be seen.
• This looks a bit like a rerun of the WeWork fiasco but the key difference is that with Klarna it is just the valuation.
• In contrast, with WeWork, it was valuation, business model and corporate governance.
• There is nothing wrong with Klarna’s business model and as far as I am aware, the company is well run although there have been a few issues around overextending credit and data privacy.
• That being said, the uncertainty around the impact of Apple leaves me concerned leading me to think that while 2.0x EV / Sales is a reasonable price, there are better options in this market.