Is Klarna (KLAR) a Buy Amid BNPL Sector Volatility and Growth Potential?

The Buy-Now-Pay-Later (BNPL) sector remains a double-edged sword for investors in 2025, balancing explosive growth with regulatory headwinds and competitive pressures. Klarna Group PLC (KLAR), a dominant player in this space, has positioned itself as both a beneficiary of the sector's expansion and a test case for its long-term sustainability. As the company prepares to report Q3 2025 earnings on November 18, 2025, with a consensus EPS estimate of -$0.26 and revenue guidance of $885.49M according to earnings preview, the question of whether KLAR is a buy hinges on its ability to navigate these dynamics while leveraging its strategic advantages.

Strategic Expansion and Competitive Positioning

Klarna's recent integration of BNPL services into Apple Pay in Denmark, Spain, and Sweden-with France set to follow-highlights its aggressive expansion strategy. This move allows users to access flexible payment options, including three interest-free installments or 30-day deferrals, directly through Apple's mobile wallet. By bridging the gap between digital and in-store retail, Klarna addresses a critical shortcoming in the BNPL sector, differentiating itself from peers like Affirm and Afterpay, which have focused more on e-commerce and digital-first solutions.

The company's financial flexibility is further bolstered by a $1B loan sale to Elliott Investment Management, which supports $6.5B in U.S. loan origination. This partnership not only strengthens Klarna's balance sheet but also enables it to scale its "fair financing" offerings, which emphasize transparent terms and interest-free options. Such innovations position Klarna to capture market share in a sector where consumer trust is increasingly tied to ethical lending practices.

Financial Performance and Valuation Challenges

Despite these strategic gains, Klarna's financials remain a mixed bag. Q3 2025 revenue is projected to reach $903M, reflecting 108% year-over-year growth, yet the company continues to report net losses, with an expected EPS of -$0.26 according to earnings preview. This pattern of high revenue growth paired with unprofitability is common in the BNPL sector, where companies prioritize market share over short-term margins. However, Klarna's valuation-trading at a price-to-sales (P/S) ratio of 5.2x, well above the industry average of 2.4x, raises concerns about whether the market is overestimating its long-term potential.

The valuation premium reflects investor optimism about Klarna's ability to dominate the BNPL space, particularly as it expands into new geographies and product lines. For instance, the Klarna Card, an AI-powered credit product, has attracted 4 million sign-ups in four months, signaling strong consumer demand. Yet, profitability remains elusive, and the company's path to sustained earnings is clouded by sector-wide challenges, including rising delinquency rates and regulatory scrutiny.

Regulatory Risks and Sector-Wide Pressures

The BNPL sector's growth trajectory is increasingly constrained by regulatory risks, particularly in Europe and the U.S. In the EU, concerns about debt risks have prompted calls for stricter oversight, potentially limiting Klarna's ability to scale its services in key markets. Similarly, in the U.S., 34–41% of BNPL users miss payments annually, with Gen Z users experiencing a 51% late payment rate. These trends have led to proposed rules that could reclassify BNPL under credit regulations, increasing compliance costs and reducing margins for providers like Klarna.

Competitors such as Affirm and Afterpay (now part of Block's ecosystem) face similar challenges. Affirm reported 46% year-over-year revenue growth in 2024, reaching $2.32B, while Afterpay contributed $1.04B in revenue to Block in 2024. However, both companies are under pressure to improve profitability amid rising credit losses and funding costs. Klarna's emphasis on interest-free installments and transparent terms may offer a slight edge, but it cannot insulate the sector from broader regulatory and economic headwinds.

Market Sentiment and Institutional Confidence

Market sentiment for KLAR is mixed. The stock has gained 1.78% in one-day trading as of November 18, 2025, but remains down 24% year-to-date. Institutional confidence, however, appears to be growing. Cathie Wood's ARK ETF recently purchased 93,218 shares of KLAR through its ARKF ETF for $3.25M, signaling a strategic bet on the company's long-term potential. While no explicit price targets were cited, this move suggests that some investors view Klarna's valuation as undervalued relative to its growth prospects.

Conclusion: A High-Risk, High-Reward Proposition

Klarna's position in the BNPL sector is both promising and precarious. Its strategic expansion into Apple Pay, financial partnerships, and product innovation demonstrate a clear vision for dominating the market. However, the company's unprofitability, regulatory risks, and competitive pressures from peers like Affirm and Afterpay cannot be ignored. For investors with a high-risk tolerance and a long-term horizon, KLAR could represent an attractive opportunity if it successfully navigates these challenges. Conversely, those seeking near-term profitability or stability may find the stock's valuation and sector volatility too daunting.

As Klarna prepares to report Q3 2025 earnings, the coming weeks will be critical in determining whether the market views its growth story as sustainable or speculative.