Klarna Beat on Earnings and Guided Lower at Once. Which Number Should Decide the Stock?

Swedish digital payments company Klarna (NYSE: KLAR) published its second-quarter results on Aug. 18, and the report arrived with mixed signals for investors. Revenue rose 27% year over year to reach $1.04 billion and beat the average analyst forecast by roughly $43 million, and the company's net income swung to $9 million following a $53 million loss in last year's quarter -- delivering per-share earnings that beat the average Wall Street forecast for a loss of $0.05 per share.

On the other hand, the buy now, pay later company cut its full-year guidance for a key metric and issued an underwhelming sales forecast. Klarna now expects gross merchandise volume (GMV) between $149 billion and $151 billion, down from its previous guidance of $155 billion. Meanwhile, revenue for the year is now projected to be between $4.08 billion and $4.16 billion -- significantly below the average analyst estimate of $4.42 billion.

Klarna's stock saw a significant pullback following its Q2 report and is now priced at about $14.30 per share, down 51% year-to-date. Should investors focus more on the significant Q2 beats or the disappointing guidance when evaluating the shares?

Image source: Getty Images.

Klarna's guidance is more important than its Q2 beats

While Klarna's Q2 beats were impressive, the company's downward revision for full-year GMV and disappointing full-year revenue guidance have greater significance for the stock. Profitability came in significantly stronger than expected in the second quarter, suggesting that the company still has avenues to outperform even with a softer sales outlook, but it's unclear whether the margin drivers that helped power the earnings beat last quarter will carry through to the second half of the year.

While Klarna expects its transaction margin to be highest in the year's fourth quarter, the company's take rate declined to 2.84% in the second quarter from 3% in Q1. With GMV now looking significantly weaker for the year, there could be meaningful implications for the company's longer-term growth trajectory.

Klarna is seeing a weaker expansion outlook in Germany and across Europe, and consumer hesitancy is translating into significantly softer GMV growth.

Adding another complicating factor, the company announced in conjunction with its Q2 report that it was shifting to fair value accounting from the Current Expected Credit Losses (CECL) method it had previously used. While fair value accounting assesses credit assets based on market prices, CECL estimates losses on credit that won't be serviced, and the new system also shifts interest revenue to an up-front event rather than being recognized over the loan's term.

The combination of Klarna's weaker GMV outlook and the shift to fair value accounting creates some significant uncertainty for investors. In addition to signs that growth momentum in transaction volumes conducted through its platform is facing meaningful headwinds, the shift in accounting methods means the company's past and future results are no longer neatly comparable -- and Klarna's overall performance trajectory is more difficult to get a read on.

So while the company's Q2 report looked strong, the company's guidance and accounting pivot have made the picture significantly more complicated.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Klarna Group. The Motley Fool has a disclosure policy.