Here's why Jim Cramer thinks red-hot IPO Klarna is still a buy at these levels

Klarna's IPO saw shares jump 14.55% on its debut, with Jim Cramer endorsing it as a 'buy' due to its reasonable valuation and improving fundamentals, despite a preference for competitor Affirm. Cramer highlighted the BNPL firm's strong growth, shrinking earnings losses, and sound credit quality, noting its strategic shift to growth post-2019 is now yielding better profitability, positioning the over $17 billion company within a robust IPO market.

Analysis

Klarna's public market debut was met with strong investor demand, as its shares closed 14.55% higher on the first day of trading, achieving a valuation over $17 billion after pricing its IPO above the initial range. The company's fundamentals are viewed as solid, supported by a strategic shift in 2019 from a history of profitability to aggressive growth, which included entering 12 new markets and expanding in the U.S. While this strategy led to a period of unprofitability, the company has demonstrated improving fundamentals since 2023, characterized by strong growth and shrinking earnings losses. Klarna's business model is diversified beyond pure-play 'buy now, pay later' services, incorporating consumer financing, advertising revenue, and budgeting tools, all underpinned by what are described as 'impressive underwriting standards.' A potential concern that the IPO was largely a secondary offering for existing shareholders is mitigated by the view that the 20-year-old company is well-seasoned and does not currently require additional capital for its growth trajectory. The positive performance of profitable peers such as Affirm and Sezzle provides a supportive backdrop, suggesting a clear and accepted path to profitability for Klarna within a currently robust IPO market.

Key Decisions for Investors

• Given the improving fundamentals and the view that the post-IPO valuation is not yet excessive, growth-focused investors could consider the stock while closely monitoring its progress toward profitability.
• Investors should track Klarna's quarterly reports for continued margin improvement and narrowing losses as key validation points for the growth-to-profitability narrative.
• It is prudent to benchmark Klarna's valuation and operational metrics against its profitable peers, Affirm (AFRM) and Sezzle (SEZL), to assess its relative market position and execution.
• For a more conservative approach to the sector, investors might consider the analyst's preferred, profitable alternative, Affirm, or use it to contextualize Klarna's performance.