Klarna: A Value Investor's Case for the Best BNPL Stock

For a value investor, the ultimate question is whether a business can compound value over decades, not just quarters. Klarna's recent trajectory suggests it is building a durable economic moat. The company has achieved five consecutive quarters of operational profitability, a critical milestone that transforms it from a growth story into a profitable enterprise. This shift is the foundation for sustainable returns, as it demonstrates the model can generate cash without constant dilution.

Scale is the other pillar of a wide moat, and Klarna is hitting inflection points. The company expects to exceed $1 billion in revenue in Q4 2025, marking its first billion-dollar quarter. This isn't just top-line growth; it's a sign of operational leverage. Revenue per employee has nearly tripled over two years, a powerful indicator of efficiency scaling with size. The path to profitability is now clearer, with management guiding for a significant uplift in transaction margin dollars as the revenue compound effect takes hold.

The most telling evidence of a widening moat is the diversification from a pure transaction model. The Klarna Card has taken off with four million signups since July, and by October, card transactions accounted for 15% of all Klarna transactions. This is a strategic pivot. A card product captures more of a consumer's wallet and creates sticky, recurring revenue, moving beyond the one-time fee per BNPL transaction. Its success, particularly in mature European markets and now in the U.S., signals a successful transition to a broader digital banking platform.

Together, these points paint a picture of a company transitioning from a high-growth fintech to a profitable, scalable financial services business. The operational profitability provides a margin of safety, the billion-dollar revenue scale offers leverage, and the card's traction shows a widening moat. For a value investor, this is the setup: a company demonstrating the durability and path to sustainable returns that are the hallmark of a true compounding machine.

Financial Health and Risk: Credit Quality and Valuation

A company's financial health is the bedrock of its intrinsic value, and for a lender like Klarna, credit quality is paramount. The data presents a mixed picture. On one hand, the CFPB study shows some positive trends, with charge-off rates declining to 1.83% in 2023 from 2.63% the prior year. That's a good sign for portfolio health. On the other, the sheer scale of the loans is growing, with the average yearly dollar value of a BNPL loan rising 14% to $848 in 2023. This expansion raises a natural question: as loans get larger, are consumers taking on more debt than they can manage? The persistent late payment rate is a red flag. The study found that approximately 34–41% of BNPL users reported making late payments in the past year. That's a significant portion of the user base, indicating a chronic credit risk that any lender must price for.

Regulatory pressure is another material risk. While federal oversight has pulled back, the industry remains under scrutiny. A group of senators and state attorneys general recently sent letters to major BNPL players, including Klarna, demanding information on user demographics and delinquency rates. This kind of inquiry signals that the political and legal environment for the business is not static. For a value investor, this means the company's operating model is exposed to potential new rules that could affect lending standards or fee structures.

Valuation, meanwhile, tells a story of high expectations. Comparing Klarna to its publicly traded peer Affirm Holdings provides a useful benchmark. Affirm trades at a premium, with an EV/Sales TTM of 8.96. This multiple reflects the market's belief in its future growth and earnings power. Yet, Affirm's PEG ratio of 0.70 suggests the market may be pricing in substantial future earnings growth, as the ratio is below 1.0. For Klarna, which is not publicly traded, this sets a high bar. Its valuation, if it were to go public, would likely need to justify a similar premium to growth, leaving little room for error if credit quality or regulatory headwinds were to worsen.

The bottom line is that Klarna's financial strength is built on a model with inherent friction. Its path to sustainable returns depends on managing credit risk as its loan sizes grow, navigating a shifting regulatory landscape, and delivering on the high growth expectations that its peers command. The recent profitability milestone is a positive step, but it must be viewed alongside these persistent risks to assess the true width of the moat.

Practical $500 Investment Guidance

For a value investor with $500 to allocate, the key is discipline. The goal isn't to time the market perfectly but to build a position with a margin of safety. Given the sector's volatility, dollar-cost averaging over three to six months is a prudent strategy. This approach mitigates the risk of entering at a peak and allows you to build a larger position at a lower average cost, turning market noise into a long-term advantage.

The recent performance of Affirm Holdings illustrates this volatility. The stock fell 8.6% over five days, a sharp move that reflects the sector's sensitivity to sentiment and macro concerns. For a value investor, such swings should be treated as noise. They are the inevitable price of admission for a sector that is still maturing and subject to regulatory and credit risk. The focus should remain on the underlying business quality and long-term compounding potential, not short-term price movements.

At the same time, the sector faces execution risks. Block, Inc.'s recent earnings miss is a clear signal. The company reported a 14.29% negative surprise on EPS and a revenue shortfall, causing its stock to fall. This underperformance, where Block has dropped 36.3% over the past 52 weeks while its sector ETF has risen, highlights competitive pressures and the difficulty of maintaining growth. It serves as a reminder that even large players can stumble, reinforcing the need for a patient, value-oriented approach that prioritizes durable moats over fleeting momentum.

The bottom line for a $500 allocation is to act methodically. Use dollar-cost averaging to navigate volatility, view sharp declines as opportunities to buy more shares at a discount, and remain focused on companies with the financial health and competitive advantages to compound value over the long cycle.

Catalysts and Guardrails: What to Watch

For a value investor, the thesis must be tested against specific, measurable outcomes. The coming quarters will reveal whether Klarna's recent progress is sustainable or a temporary peak. The key metrics to monitor are the twin engines of profitability: transaction margin dollars and loan loss provisions. Management has guided for transaction margin dollars to increase by over $100 million in Q4 as revenue compounds. This is the critical test. If the increase materializes, it validates the model's scalability and the path to higher profitability. Conversely, if margin growth lags, it could signal pricing pressure or higher-than-expected credit costs, challenging the moat thesis.

Regulatory developments represent a parallel guardrail. The industry is under increasing scrutiny, with a group of senators and state attorneys general recently demanding information from major BNPL players. This inquiry is a precursor to potential action. Watch for new rules in the U.S. and EU that could mandate stricter affordability checks or alter fee structures. Such mandates would directly impact Klarna's growth trajectory and lending economics, turning a potential catalyst into a headwind.

Finally, track the diversification catalysts that are critical to long-term value. For Klarna, the performance of the Klarna Card is paramount. Its success in driving 15% of global transactions and attracting four million signups in four months shows promise. The next phase is proving it can scale profitably across its ecosystem. For the sector, watch Affirm's partnerships with major merchants. These alliances are essential for expanding reach and securing high-volume transaction flows, moving beyond reliance on a few large clients. The bottom line is that value is built on execution. The coming quarters will show if Klarna can convert its scale and card momentum into durable, wide-margin profits, while navigating a complex regulatory landscape.