Klarna vs PayPal: which company to choose, following Buffett's principles?

Swedish company Klarna, one of the leaders of the "buy now, pay later" market, has finally gone public. It still remains unprofitable. Its competitor, the American PayPal, is also having a tough time: it is profitable, but its growth is slowing down. The shares of both companies look undervalued. Which one is better for a long-term investor?

The recent IPO of the Swedish company Klarna - one of the pioneers of the buy now, pay later (BNPL) installment system - shows how important it is for many companies not only to build a successful business, but also to go public on time. After all, investment fashion is very fickle.

The fintech boom was left in 2021, when money was almost free due to low central bank rates and lockdowns due to the COVID-19 pandemic fueled the growth of the e-commerce market.

And it, in turn, was accompanied by a rapid proliferation of new payment solutions, including BNPL, where Klarna was the unequivocal leader in many business metrics.

In 2021, the Swedish company was valued at $45.6 billion in another investment round, making it Europe's most valuable tech company at the time, but the following year, Klarna's valuation collapsed 85% to less than $7 billion in another round.

Klarna CEO Sebastian Siemiatkowski officially announced the IPO back in 2019, but it didn't finally happen until six years later, in the company's 20th anniversary year. On September 9, 2025, the company raised $1.37 billion in an initial public offering, selling 34.3 million securities at $40 per share. Its final IPO valuation was three times less than what it had been at its peak in 2021.

And although the demand for the company's shares during the offering exceeded the supply more than 25 times, this does not suggest a cloudless future for its quotations, especially if the growth rate of its business disappoints investors.

Klarna's slightly older competitor on the payment solutions market, the American company PayPal, will not let you lie. It started working in the BNPL segment a little later than Klarna.

Back in 2021, its quotes were as high as $310, but then plummeted and has been trading in the $50-90 range for the past three years without much hope for the financial giant to regain its former glory.

The reason for this was investors' overestimation of the company's business growth rates.

At an Investor Day in early 2021, PayPal management was very optimistic, predicting average annual revenue growth over the next five years of about 20% - from $21.5 billion in 2020 to over $50 billion by the end of 2025.

Targets for many other metrics looked no less ambitious. According to PayPal's own forecasts, the average annual growth in earnings per share for this period was to be 22%. The company was going to grow its customer base from 377 million in 2020 to 750 million in 2025, which would correspond to an average annual growth rate of 15%.

The total volume of payments through PayPal was supposed to increase at an impressive rate of 25% per year. By the end of 2025, this figure was expected to reach $2.8 trillion.

All of this should have allowed the company to generate free cash flow totaling more than $40 billion over those five years, and it was expected to exceed $10 billion by the end of 2025.

At the time, these goals did not seem overly optimistic, as the company had been growing quite rapidly in the five years preceding Investor Day, often exceeding interim growth targets for key business metrics.

Thus, over the period of 2015-2020, PayPal more than doubled its revenue and number of customers, more than tripled its earnings per share and free cash flow. All this ultimately translated into more than sevenfold growth in market capitalization.

The first year of this five-year plan was well on track. The number of clients at the end of 2021 grew by 13%, and the total volume of payments (including exchange rate differences) soared by 31%.

In turn, revenue rose 18% to $25.4 billion, earnings per share rose 19% to $4.6, while free cash flow rose 9% to $5.4 billion.

But already in 2022, the situation has changed markedly for the worse. In February, the company abandoned its goals of significantly increasing its customer base in favor of retaining high-quality customers, who were supposed to generate the lion's share of revenue. PayPal also adjusted its revenue and profit growth targets, but not very significantly.

It is now safe to say that the ambitious five-year plan for 2021 has been a complete failure. At the end of the second quarter of 2025, the number of customers totaled only 438 million and the number of active customers per month was 226 million. Both indicators grew by only 2% over the year.

For 2025, the company forecasts net cash flow of $6-7 billion and EPS of $5.15-5.3. And this is despite the fact that the share buyback at the end of 2025 is projected to be in the neighborhood of $6 bln.

All of this could not but affect the multiples of the company, which rapidly moved from the category of high-growth to the category of severely undervalued.

Now PayPal is traded at the level of 14.1 by P/E multiple (capitalization to earnings ratio). For comparison, the S&P 500 index has a P/E of 30.83.

In 2020, the market valued PayPal at 5 times this multiple - it was as high as 80, while the S&P 500 Index had a maximum of 35 briefly at the time.

Klarna's key task now is to try not to repeat the path of Paypal. Although it will not be easy to do this, because the company operates in a very competitive segment. In 2023, for example, at least 10 players in the BNPL market either stopped operating completely (Openpay, Laterpay and Zest) or reduced operations (Zip and Clearpay).

Klarna understands this very well and is trying to diversify its business, moving away from the pure BNPL model towards trading platforms. No wonder, because the rather high growth rates of a few years ago are predicted to decrease noticeably in the future.

Accordingly, the first signs of a slowdown in Klarna's key business metrics can be seen now.

At the end of the second quarter of 2025, the number of consumers using Klarna's services totaled 111 million, up 31% year-over-year. But the average annual growth rate of consumers over the last 2.5 years is only 14.6%.

The network's gross merchandise turnover (GMV) was $31.2 billion in the second quarter, 19% higher than a year earlier. The average annual growth rate of this indicator over 4.5 years amounted to 18%, while in the period from 2015 to 2020 it increased by an average of 54.6% annually.

In turn, the company's revenue per active customer declined about 7% year-over-year to $27 in the second quarter of 2025.

Revenue itself grew 20.7% year-over-year to $823 million in the second quarter of 2025, roughly in line with the growth rate of the figure in the previous two years.

Such dynamics of the main indicators cannot be called impressive.

At least the revenue of their direct competitor in the U.S. market, Affirm, has grown 1.5 times faster in the last three years.

It should not be forgotten that Klarna continues to be unprofitable, although it should be recognized that the company's losses have been shrinking rapidly in recent years. Nevertheless, the question of how profitable the credit card killer model can be, as the BNPL segment was once called, remains open: after all, it does not imply such high interest rates on installment loans.

PayPal, despite all the difficulties with business growth, still remains a profitable company and demonstrates very high efficiency indicators. Thus, its return on assets for the last 12 months amounted to 4.6%, and return on equity was 22.9%. Klarna's return on equity for the last 12 months was negative - minus 3.9%.

According to Worldpay's forecasts from The Global Payments Report 2025, the e-commerce market will grow at an average annual rate of 8% between 2024 and 2030 to reach $10.8 trillion in 2030, and only 5% will be accounted for by the BNPL segment. By comparison, the e-wallet segment will account for 65% and credit cards for 13%.

Moreover, the main markets where Klarna operates can already be called relatively mature. That is, there are almost no opportunities for extensive growth there. For example, BNPL's share of the European e-commerce market is already 8%, and in Sweden and Germany it exceeds 20% (by the end of 2024). In the USA, where Klarna is also actively developing its business, this share is already 6%. For comparison, in Latin America this figure still does not exceed 1%.

Not surprisingly, in such an environment, Klarna trades though expensive, but its multiples are not amazing.

Thus, the company's forecasted P/E is now at 40.82, P/S is 5.65, and EV/EBITDA is 17.99.

On the other hand, the five-year PEG ratio (which gives an indication of how fair the share price is given the earnings growth rate) is only 0.17. A valuation is considered fair if it equals one. Simply put, Klarna stock is currently valued very cheaply. And in theory, this implies a very serious growth potential, if, of course, the company is able to increase its performance at the planned pace.

For obvious reasons, PayPal (a mature company with a low growth rate) has all of these metrics much lower: its projected P/E is at 11.6, P/S is 2.09, EV/EBITDA is 9.03. And its five-year PEG ratio is 0.74. That is, investors also undervalue it, but this assessment is still closer to a fair level.

From the point of view of a long-term investor, there is no unambiguous favorite among these companies. Each has its own advantages and disadvantages. And it is not necessary to choose only between them. The market for payment solutions is very wide.

But if Warren Buffett was faced with the question of which of them to add to his portfolio, I think he would choose PayPal, an undervalued company that continues to generate a lot of cash flow, albeit without serious revenue growth potential, at least for the time being. But since the recognized investment guru has a wider choice, in this sector he's betting heavily on Visa and Mastercard, which still have a large share of the payment infrastructure tied to them worldwide.

Right now PayPal doesn't pay a dividend, but if the company were to direct the $6 billion it's currently spending on buybacks toward paying them, that could be a serious consideration for many investors.

In turn, it is unlikely to find very compelling reasons to choose Klarna unless it finds new points of growth. Otherwise, the dynamics of its key operating indicators will inevitably slow down. Even if the Swedish giant is able to turn a profit, profitability is unlikely to be high.

Keep in mind, too, that Klarna's business is much more cyclical than PayPal's at the moment, and in the event of a recession, loan delinquencies could rise significantly.

At least in the U.S., low-quality borrowers account for about two-thirds of the BNPL market.

Does not constitute an investment recommendation.

This article was AI-translated and verified by a human editor