GM. This is Milk Road PRO, explaining why Wall Street was modeling the wrong company when Klarna printed Q1.
Today's edition features our latest PRO report breaking down Klarna's surprise Q1 results, why analysts had the wrong model on the company, and whether the 13% pop is the start of a real turn or just a one-quarter beat. You'll get the opening below, with the rest on the site.
Here’s what we’ve got for you today:
- 📊 Klarna's 1 cent loss vs the 20 cent loss expected, with operating profit jumping from $3M to $68M.
- 🔌 The PSP shift with Stripe live, plus JPMorgan Payments and Worldpay coming in 2026.
- 🏦 Why Klarna's banking license and $12.3B in EU deposits set it apart from Affirm and Afterpay.
- 🎯 The four risks that could break the thesis, including the soft Q2 guide.
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ANALYSTS MODELED THE WRONG COMPANY
Analysts expected Klarna to post a Q1 loss of 20 cents per share.
Instead, Klarna reported a loss of just 1 cent per share.
A miss that large means the street was modeling the wrong company. Going in, KLAR was down 45% YTD.
Two major banks had just initiated coverage at Hold. Consensus was bracing for another rough quarter.
Then the print landed:
- Revenue beat. Margins beat.
- Operating profit grew more than 20-fold year-over-year.
- Net income turned positive for the first time in over a year.
- The stock ripped 13%.
So here's the question this report answers: was Q1 a real turn for Klarna, or a one-quarter beat that fades when comps get harder?
My thesis: This is the start of something bigger.
Klarna spent five years building a network of merchants, consumers, and distribution partners. Q1 is the quarter where that build finally started to pay off.
HOW KLARNA ACTUALLY WORKS
Most people know Klarna as the pink button at online checkout that lets you split a purchase into four payments.
But there's more underneath.
Klarna runs three products on the same network.
1. Pay Now is the basic option. You check out, you pay in full, like a debit card. No interest, no installments. About half of Klarna's transactions sit here, and this is the part growing fastest.
2. Pay Later is the original BNPL (buy now, pay later) product. This is what you see in the picture above. You split a small or mid-size purchase into four interest-free installments over six weeks. The merchant pays Klarna a fee (typically 3-5% of the basket). The consumer pays nothing as long as they don't miss a payment.
3. Fair Financing is for bigger purchases. Think a $1,500 mattress or a $3,000 e-bike, paid off over 6, 12, or 24 months with interest. This is the part of the business that looks most like a traditional bank loan.
On the other side of the network are the merchants.
Klarna has 1.07M of them integrated at checkout, including Sephora, Macy's, Nike, Uber, H&M, and Airbnb.
They pay Klarna to be at checkout because it reliably lifts conversion and average basket size.
Both sides of the network have been growing for years.
Customers grew from 79M to 119M between 2022 and Q1 2026. Merchants grew from 394K to 1.1M. And the take-rate (revenue per dollar of GMV) expanded from 2.30% to 2.80%. The network is getting bigger and more efficient at the same time.
What makes Klarna different from Affirm or Afterpay is the funding side.
Klarna is a licensed bank in the EU, with $12.3B of consumer deposits sitting on its balance sheet. It funds the loans it makes with those deposits, the way any bank does.
Affirm and Afterpay borrow in wholesale markets, which gets expensive when rates rise.
The CEO frames the whole business as "spend-centric, not lend-centric."
Translation: Klarna wants to be the payments network at checkout (closer to Visa), not the credit company behind the loan (closer to Affirm).
The Q1 print is the first quarter that framing produced numbers to back it up.
INSIDE THE Q1 PRINT
Revenue came in at $1.012B against a $944M consensus. Adjusted operating profit went from $3M a year ago to $68M this quarter.
Those are the numbers that moved the stock.
Underneath the headline, four things stood out.
Revenue grew across every product line. Klarna's total revenue rose 44% year-over-year, and the contributions were distributed.
- Fair Financing volume rose 138%, lifting the bigger-ticket installment book to 12% of total volume.
- Transaction and service revenue (the fees from merchants) rose 29%, in line with the growing merchant base.
- Interest income grew 56% as the Fair Financing book scaled.
- Even consumer membership revenue, a tiny line a year ago, grew nearly sixfold.
Operating costs grew slower than revenue.
Transaction costs (what Klarna pays to process payments, fund loans, and reserve for losses) grew 45%, in line with revenue.
But non-transaction operating expenses (staff, technology, overhead) grew only 3%. Revenue per employee reached $1.4M, four times the 2022 level.
The funding side held up.
Net income was $1M.
Tiny in absolute terms, but a $100M swing from the prior-year period and Klarna's first GAAP profit as a public company.
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WILL IT KEEP GROWING
Klarna's growth case rests on three things, all firing in Q1. The question is whether they keep firing.
Distribution
For most of Klarna's history, getting in front of a new merchant required direct integration: Klarna's sales team selling to the merchant, the merchant's developers wiring up the checkout, a long sales cycle for each name.
That model works, but it scales linearly with headcount.
The new model is to live inside the payment service providers (PSPs) that merchants already use.
If you're a merchant on Stripe, Klarna shows up automatically as a checkout option - no separate integration required.
- Stripe went live as a default PSP partner in Q1.
- Nexi (Europe's largest acquirer) launched last quarter through Paytrail.
- Worldpay and JPMorgan Payments are scheduled to go live during the rest of 2026.
Stripe alone processes around $1.4T in annual payment volume. Even if Klarna captures a small fraction of that as eligible BNPL transactions, the absolute dollar uplift exceeds what direct sales can deliver.
There's also the Google Pay integration.
Klarna announced this month that its flexible payments will appear in Google Search results and inside the Gemini app, through Google Pay in the U.S.
That puts Klarna in front of several hundred million additional U.S. users who don't necessarily visit merchant checkouts but do search and chat with AI.
The U.S. runway is the size of the opportunity.
Klarna launched in Sweden in 2005, and 20 years later, it reaches over 85% of Swedish consumers and 41% of Swedish e-commerce. Newer markets are climbing the same curve.
Klarna launched in the U.S. in 2019.
It's at 11% consumer penetration and 1% of U.S. e-commerce. If the U.S. tracks Germany (launched 2010, now at 35% consumer penetration) or the UK (2014, at 24%), the U.S. business is somewhere between a quarter and a third of what the playbook says it can become.
The PSP rollout is the mechanism that closes that gap faster than direct sales ever could.
Product flywheel
Pay Now (the basic checkout option) gives Klarna a daily-spend habit. Pay Later (four interest-free installments) is the awareness-building product. Fair Financing (longer installments with interest) is what generates the dollars and the margin.
Each product feeds the next. A user who pays now becomes a candidate for pay-later, then graduates to financing for bigger purchases.
Fair Financing grew 138% in Q1 because the average user is moving through that funnel.
Management expects Fair Financing volume to keep growing through 2026, with the growth rate moderating as comps normalize, but the absolute dollar contribution increasing as earlier loans mature into recurring interest income.
That's what the CEO calls "spend-centric." Growth comes from wallet share across the three products, with each one reinforcing the others.
Operating leverage
The 3% growth in non-transaction operating expenses is the line that decides whether Q1 was a real profit or a fluke.
Klarna has been aggressive about replacing roles with AI tooling. By the CEO's own framing, the company hasn't backfilled most of the staff who left during the 2023-2024 reorganization.
The result is revenue per employee at $1.4M, four times the 2022 level.
The next question is how much further this runs.
Management has guided to an adjusted operating margin (operating profit as a share of revenue) above 6.9% for full-year 2026, with a medium-term target of around 25%.
For reference, Q1 came in at 6.7%, so the full-year guide is essentially the current run rate.
Hitting 25% would mean compounding the kind of cost discipline Q1 showed over several more years. The Q1 print is the first hard data point that says it's possible.
Funding and credit
A new $2B forward-flow facility this quarter lets Klarna pre-sell newly originated U.S. loans to outside investors. Because the loans are short-duration (six weeks for Pay Later, monthly amortization on Fair Financing), the same $2B keeps recycling. Klarna says that translates into roughly $17B of U.S. financing capacity per year, enough to fund several quarters of Fair Financing growth without raising new capital.
The EU side runs on $12.3B of consumer deposits, cheaper funding than anything Affirm or Afterpay can access.
The growth came without credit damage. Provisions for credit losses ran at 0.55% of GMV in Q1 versus 0.54% a year ago, even as Fair Financing volume rose 138%. If credit were deteriorating, Klarna would have to choose between slowing the growth or accepting worse unit economics. Q1 says it doesn't.
The question for the rest of the year is whether they keep showing up together.
HOW IT’S PRICED
After the 13% pop on Q1, KLAR trades around $16. The market cap is about $5.7B.
That's roughly 60% below the Sept. 2025 IPO price of $40 and well off the 52-week high of $57. The stock spent most of 2026 between $12 and $14 before the print.
The valuation underneath the price is the part worth understanding.
Klarna has roughly $3.7B of net cash on the balance sheet ($5.2B in cash and short-term investments, $1.4B in debt). That means the enterprise value (market cap minus net cash, or what investors are actually paying for the operating business) is closer to $2B.
On about $4B of expected 2026 revenue, the enterprise value works out to roughly 0.5x revenue. For context: Affirm trades at 4-5x revenue. Visa and Mastercard trade in the high teens.
Pure-play payment networks usually trade at multiples this low only when the market thinks growth is over.
The earnings multiples don't tell a story yet because Klarna only JUST turned profitable.
Trailing twelve-month EPS is -$0.79, so the P/E ratio is meaningless. On 2026 guidance, the forward P/E is still negative. Klarna says EPS will turn positive in the full-year 2027.
Wall Street's view is split.
The consensus rating is Buy, but the 12-month price target range runs from $14 to $45, one of the widest spreads on any large fintech.
The median target is around $22, implying roughly 35% upside from here. The bear-end targets from TD Cowen and BMO sit at $16, both initiated weeks before the print and matching where the stock trades today. Goldman Sachs raised its target to $21 the day after Q1.
What this price implies, roughly: low single-digit revenue growth, no margin expansion, no credit improvement, and no value from the AI cost program or the new distribution channels. In one phrase, a slowing legacy lender.
WHAT THE MARKET IS MISSING
That pricing rests on a few specific bets about how Klarna's business runs. The Q1 print pushed back on each of them.
Credit book resets every 39 days
The number that matters is at the bottom of the chart: blended weighted average life of about 39 days, with the whole book turning over roughly 10 times per year. Pay Later (80% of GMV) averages $100 ticket sizes and clears in 27 days. Fair Financing is just 9% of GMV at 109 days, even though it gets all the attention in the credit cycle.
For context, the average U.S. consumer carries a credit card balance of $6,961. A typical U.S. bank consumer loan runs 2.5 years. Nordic bank loans run for five years.
That structural difference shows up in two places. First, credit losses compress fast when growth slows because the book runs off in weeks. Second, the asset/liability mismatch that broke regional banks in 2023 is much smaller when assets reprice every 39 days against stable deposits.
The peer group is wrong
The biggest analytical mistake in the bear case is treating Klarna like a U.S. BNPL pure-play. They look similar at the checkout button: both offer pay-in-four installments. Underneath, the businesses are different.
Klarna has a banking license and $12.3B of consumer deposits that fund 90% of its loan book. Affirm has neither. Affirm's wholesale funding has to reprice in real time as rates change.
Klarna's deposit base is stickier and less exposed to that volatility. The funding cost gap shows up in transaction margins quarter after quarter.
The revenue mix is also different.
Affirm makes most of its money from credit-related lines (interest income, gain on loan sales). Klarna's interest income is 28% of revenue. The rest is transaction fees from merchants, interchange on the Klarna card, and membership revenue.
That mix looks more like a payments network than a lender.
When the market puts KLAR at 0.5x revenue, it's pricing a melting lender. The actual business is closer to a small Visa with a bank attached.
The AI cost program is structural
This is the part of the thesis that bears can credibly push back on. AI-driven efficiency gains have a long history of being one-off rather than durable. The street is reasonable to want more data.
What they added in Q1 was the gap.
Non-transaction operating expenses grew 3% while revenue grew 44%. That 3% on 44% is what a structurally different cost base looks like. Revenue per employee at $1.4M (four times the 2022 level) is what happens when the operating model itself shifts.
For the medium-term 25% operating margin target to mean anything, that gap has to persist for several more years. Q1 was the first hard data point that says it can.
The next two prints decide whether the data point becomes a trend.
Reported margins lag the actual economics
Klarna's reported profitability looks worse than the underlying business because of how the accounting timing works.
The mechanism: under IFRS, Klarna has to book an expected credit loss provision (roughly 4% of the loan) the moment a Fair Financing loan is originated. The interest income from that loan gets recognized over the next 6 to 24 months as the customer pays. So, a quarter where Klarna writes a lot of new Fair Financing loans takes a big provision hit upfront and earns the offsetting interest over the following year.
U.S. Fair Financing grew over 200% year-over-year in Q1. The higher provision line in Q1 is the accounting consequence of that growth.
Affirm went through the same dynamic for years. Reported margins stayed depressed while the loan book scaled. As growth moderated and earlier vintages started seasoning, provisions caught up, and reported margins jumped.
The implication: if Klarna's Fair Financing growth moderates over the next two to four quarters (as comps normalize), while the earlier U.S. loans season, the headline margin should mechanically expand even before anything in the underlying business changes.
The distribution rollout isn't in any model
Consensus revenue estimates for 2026 and 2027 implicitly assume Klarna's merchant count grows the way it has for the last five years: by direct sales, one merchant at a time. The new model is different. Stripe is live. JPMorgan Payments and Worldpay launch later this year. The Google Pay integration into Search and Gemini just got announced.
None of these have produced visible revenue yet, so none are in the consensus models. The downside of these channels is disappointingly small. The upside if they work is several times Klarna's current U.S. revenue.
WHAT COULD BREAK THIS
Every part of the case above has a way it could be wrong. The four are worth taking seriously.
The credit cycle
Klarna's flat credit-loss ratio in Q1 came on a benign U.S. consumer backdrop.
Unemployment is still low. Real wages are still positive. If U.S. unemployment rises meaningfully into late 2026, the new Fair Financing book has never been tested through that environment.
The argument that short-duration loans run off fast is only useful if new originations slow down at the same time. If Klarna keeps growing into rising losses, the math reverses.
What I'd want to see: charge-off rates in the U.S. Fair Financing cohorts holding flat through one full quarter of consumer softness.
The competitive response
The PSP distribution thesis assumes Klarna gets default placement at Stripe, JPMorgan, and Worldpay. None of those partnerships is exclusive. Stripe can add Affirm or Afterpay as alternatives at the same checkout.
PayPal already has free distribution to 400M+ users through Pay in 4. Apple could re-enter the BNPL market at scale. The thesis assumes Klarna's network, license, and brand will let it take a disproportionate share even as competition stays present.
If Klarna's take-rate compresses or its U.S. market share stalls, that's the bear case showing up.
The PSP launches are slipping
JPMorgan Payments and Worldpay are scheduled to go live "during 2026." Software integration timelines slip routinely. And even after the integrations go live, the CEO has flagged that "merchant activation will be gradual over multiple years."
If the actual flow of new merchants from these channels doesn't show up in the 2026 prints, a meaningful part of the bull case stays on paper.
Q2 is missing the soft guide
Klarna guided Q2 revenue to $960M-$1B, sequentially below Q1's $1.012B.
The guide is soft enough that hitting it doesn't really validate the thesis.
If Q2 comes in below $960M, especially because of transaction margin compression, the implication is that Q1 was the high-water mark of this cycle. That would call the whole inflection thesis into question.
Any one of these alone would dent the thesis. Two of them together would break it.
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