- Key insights: Shares of Klarna plummeted nearly 30% on Thursday following the company's fourth-quarter earnings report despite posting revenue of more than $1 billion. The sell-off continued into Friday, with shares falling 5% as of mid-afternoon.
- What's at stake: Investors balked at the up-front loan loss provision expenses that come with the expansion of Klarna's longer-term installment loans.
- Forward look: Certain accounting principles require lenders to book expected loss provisions at origination, which causes expenses to be front loaded while interest revenue is booked throughout the life of the loan.
Klarna's stock has tumbled following its fourth-quarter earnings. Investors balked at up-front loan loss provision expenses associated with Klarna's growth of its longer-term installment loan portfolio.
Shares of the neobank plummeted nearly 30% to $13.84 per diluted share at market close on Thursday, with the sell-off continuing into Friday afternoon. As of 2:00 p.m. ET, shares had fallen another 5% to $13.22. Klarna's stock has fallen 69% since its
The stock decline reflected heightened investor caution regarding the company's ability to balance rising loss provisions with durable growth, Wedbush Securities analyst Scott Devitt said in a research note. Weak guidance compared with analyst estimates also contributed to the decline, he said.
The core issue is with compressed transaction margins due to accounting standards that require lenders to book loan loss provisions at origination. That causes expenses to rise as loan portfolios grow, while revenue from those transactions is spread out over the life of the loan. Klarna has been expanding its longer-term lending product, which it calls Fair Financing, in its effort to
"Performance was consistent with management's prior commentary on expected transaction margin pressure in the near-term as fair financing volume growth outpaces other areas of the business," Devitt said. "Although fair financing loans require a greater provisioning up-front, the benefit of these loans compound as interest revenues are recognized over the life of the loan."
Klarna is just now ramping up its interest-bearing loan products, which account for 12% of its gross merchandise volume, according to William Blair analyst Andrew Jeffrey. By comparison, Affirm's interest-free installment products make up about 17% of its GMV.
Klarna CEO Sebastian Siemiatkowski acknowledged transaction margin pressure on the company's quarterly earnings call with analysts Thursday. "I want to be direct and transparent. This quarter's transaction margin dollar result did not land where we guided," he said. "We take that seriously. The acceleration in lending growth is the primary driver of that outcome."
Siemiatkowski sought to reassure investors that the long-term gain of its fair financing loans was worth the near-term expense.
"We doubled the amount of merchants where fair financing is available," he said. "For $2.5 billion of U.S. fair financing portfolio originated in the quarter, $80 million in provisions were booked upfront, alongside $40 million in revenue, generating an immediate $40 million headwind, but yielding $180 million in future interest income."
Transaction margin dollars before provisions grew 31% year over year to $622 million, according to Klarna. After provisions, transaction margin dollar was $372 million up 17% year over year.
"Some of you may even remember JPMorganChase faced this. Jamie Dimon famously said on the Sapphire card that he wished he had taken twice the losses," Siemiatkowski said. "This was 2017. Slightly different rules, but same concept. So the question becomes, given that we can issue those additional loans, should we? And as a shareholder at least, my answer is an absolute yes."
Sanjay Sakhrani, an analyst at Keefe, Bruyette and Woods, called the stock reaction "overdone" in a research note.
"While the execution has been disappointing, the stock's performance has been worse than the shortfall," Sakhrani said. "While the near-term optics are not great, profitability should improve once fair financing growth normalizes."
Revenue edged out analysts' expectations at $1.08 billion, an increase of 38% from the same reporting period last year. Analysts expected $1.07 billion, according to S&P Capital IQ. The neobank posted a net loss of $26 million, or a 2 cent loss per share. Wall Street expected a net income of $7.15 million.
GMV was up 32% to $38.7 billion, and users that use Klarna's banking services outside of just buy now/pay later installment lending, which Klarna says generate three-times more revenue per customer, doubled to 15.8 million. Fair financing GMV surged 165% to $4.5 billion.
Total merchants were up 42% year over year to 966,000, and active customers increased 28% to 180,000. Klarna card active users catapulted to 4.2 million, a 288% increase. Consumer deposits were up $13 billion, an increase of 37% year over year.
"As we scale this business, delivering on profitability is a key priority," Siemiatkowski said.
