RDDT

Could This Artificial Intelligence (AI) Fintech Be 1 of 2024's Largest IPOs?

After a tumultuous two-year period for initial public offerings (IPOs), signs point to a potential turnaround for the market. On March 21, Reddit made its public debut, and it is a big test to see how markets respond to new issuers.

One company discussing plans for a 2024 IPO is Klarna, the European buy now, pay later company. Klarna aims to be the "artificial intelligence (AI) bank" and eyes a $20 billion valuation when it goes public. Here are some facts to know about Klarna.

A person uses their phone to make a payment in a coffee shop.

Image source: Getty Images.

Klarna's growing U.S. presence

Founded in 2005, Klarna is a Swedish bank that has risen in popularity thanks to its flexible payment plans, known as buy now, pay later (BNPL). Klarna's reach is huge, processing 2.5 million transactions daily across its 150 million customers worldwide.

The company partners with 250,000 merchants in 25 countries, but its goal isn't to be a simple checkout option on every website. Instead, the company aspires to be at the center of payments, shopping, and banking.

More recently, it has focused its efforts on the U.S. market, which has become its largest revenue producer for the first time since entering the market in 2015. Last year, the fintech generated a gross profit for the first time in the U.S. and it has done an excellent job of streamlining its operations. But it has been a rough ride over the past two years.

How the fintech used AI to drastically reduce costs

Economic stresses during the past few years have pressured the BNPL industry. Notably, high inflation accompanied by rising interest rates have had a significant impact on young upstart companies. In 2022, as interest rates started picking up, Klarna's borrowing costs increased to highest level ever.

Not only did borrowing costs rise, but companies in the BNPL niche also saw valuations slashed dramatically. During 2023, Klarna's indicated valuation got cut from $45.6 billion to just $6.7 billion, as rising costs and uncertainty about the economy weighed on all companies, big and small.

One area Klarna struggled with was rising costs. Last year, the fintech bank aimed to improve its efficiency and credit quality. One way it did this was by leveraging generative AI. Klarna quickly adopted AI last year and leveraged ChatGPT to build tools that automate some of the more repetitive, time-consuming tasks for employees.

The fintech bank also used AI to evolve its comprehensive financial digital assistant, which it sees as critical to its long-term success. Klarna's embrace of AI has been a positive for the company, resulting in lower costs and more efficient operations.

A person sits looks at a transparent screen that shows a chatbot conversation.

Image source: Getty Images.

In a company press release, Klarna said that its digital assistant was doing the equivalent work of 700 full-time customer-service agents. Other benefits of the digital assistant include a 25% drop in repeat inquiries and a drastic reduction in time to resolve customer inquiries. Its embrace of AI has made it so the company doesn't have to hire as many people and is an excellent example of how up-and-coming companies are leveraging the technology to scale up without seeing expenses balloon at the same time.

The move to AI has brought great results. Last year, it processed 981 billion Swedish kronor ($93 billion) in gross merchandise volume, 17% growth from the prior year. This growth came while the company cut operating expenses by 16%, with big reductions in sales, marketing and customer service. As a result, its operating loss of 3.2 billion kronor drastically improved from the prior year's loss of 10.5 billion kronor.

Look for Klarna to go public in Q3

According to data firm Caplight, reported by Fortune, Klarna's recent fundraising indicated a valuation of about $9.5 billion. The company has narrowed its losses, and markets seem to be more welcoming toward IPOs.

Klarna has been in talks with investment banks about going public and could do an IPO as soon as the third quarter, with Bloomberg reporting the company is eyeing a $20 billion valuation. Now could be a good time, too. BNPL usage is rising, and more favorable market conditions could make Klarna's IPO one investors will want to keep a close eye on later this year.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has nearly tripled the market.*

They just revealed what they believe are the 10 best stocks for investors to buy right now…

See the 10 stocks

*Stock Advisor returns as of March 21, 2024

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Tags

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.