Klarna Price Target Slashed by 41% Amid Execution Concerns and Looming Share Unlock

Klarna's stock (NYSE:KLAR) has fallen 32.7% so far this year, to sit 58% lower on a rolling 12 month basis. Whilst a slashed price target may not sound bullish, one that leaves behind significant potential upside is not exactly bearish either.

Morgan Stanley has delivered a sobering reassessment of Klarna Group plc, cutting its price target from $39 to $23, a 41% reduction that underscores mounting concerns about the Swedish fintech's ability to execute in its critical U.S. market just as 335.5 million shares prepare to flood the market next month.

Klarna shares closed at $19.22 yesterday, representing a solid gain of $1.12 or 6% from the previous session. However, the stock remains substantially below Morgan Stanley's newly reduced $23 target and trades at a steep 51% discount to the firm's previous $39 target established in November 2025.

Since its September 2025 initial public offering at $40 per share, Klarna has surrendered more than half its value, reflecting persistent skepticism about the company's long-term profitability and competitive positioning in the crowded Buy Now, Pay Later sector.

The current trading level places Klarna at a significant valuation discount to domestic rival Affirm Holdings, a gap that analyst James Faucette acknowledges has attracted some investor interest but remains insufficient to warrant upgrading the stock without tangible evidence of improved operational execution.

Core Details

Morgan Stanley's downgrade centers on Klarna's struggle to demonstrate consistent performance in its U.S. Fair Financing business, which has emerged as a critical growth driver but also a source of credit quality concerns. Faucette maintains an Equal Weight rating, effectively recommending that investors neither accumulate nor reduce positions until the company can “string together a few quarters of clean U.S. Fair Financing execution.”

The timing of the downgrade carries particular significance given the March 9, 2026 expiration of Klarna's post-IPO lock-up period. The release of 335.5 million shares, representing a substantial portion of the company's outstanding equity, threatens to create significant selling pressure as early investors and employees gain liquidity. Morgan Stanley explicitly cited this upcoming catalyst as a headwind that will likely prevent any meaningful stock recovery in the near term.

Despite these concerns, Klarna's underlying business metrics have shown notable strength. The company reported record third-quarter 2025 revenue of $903 million, marking a 26% year-over-year increase. U.S. revenue surged 51%, while Gross Merchandise Volume climbed 43%, demonstrating robust consumer adoption of the platform. The Klarna Card attracted four million sign-ups within four months of launch, suggesting the company is successfully expanding beyond traditional point-of-sale financing into broader banking services.

CEO Sebastian Siemiatkowski expressed confidence during the Q3 earnings call that the company would surpass $1 billion in quarterly revenue during the fourth quarter of 2025, a milestone that would validate Klarna's scale and market position. The executive has consistently emphasized the company's AI-driven operational model as a competitive advantage, claiming it enables superior unit economics compared to traditional financial services providers.

However, Morgan Stanley's November 2025 research note, which preceded the current downgrade, raised red flags about the rapid expansion of Klarna's Fair Financing portfolio and questioned whether credit performance could remain durable as the book seasoned. The firm specifically called for evidence of “consistent credit performance and accelerating GMV” before markets would reward the stock with a higher multiple.

Outlook

The contrast between Klarna's operational momentum and its struggling stock price highlights the market's focus on profitability and credit risk rather than top-line growth. While the company has successfully scaled revenue and user engagement, questions persist about whether its lending model can generate sustainable returns without experiencing material credit losses as economic conditions evolve.

The upcoming lock-up expiration represents the most immediate risk to share price stability. With more than 335 million shares becoming freely tradeable, markets will closely watch whether insiders and early backers use the opportunity to reduce their positions. Historical precedent suggests that lock-up expirations for recently public growth companies often trigger volatility and downward pressure, particularly when stocks are trading below IPO prices.

Technical factors compound these concerns. Klarna's sustained trading below its $40 IPO price has eliminated the natural support level that often anchors newly public stocks. The next meaningful technical support may not emerge until the stock tests its post-IPO lows, potentially creating additional downside risk if the lock-up expiration triggers meaningful selling.

From a competitive standpoint, Klarna faces intensifying pressure from both established players like Affirm and PayPal, as well as emerging fintech challengers. The BNPL sector has attracted significant capital and innovation, compressing margins and forcing providers to differentiate through credit decisioning, user experience, and merchant relationships. Klarna's international footprint provides some insulation from U.S.-centric competitors, but the company's growth strategy clearly prioritizes the American market, where execution challenges have proven most acute.

The company's pivot toward becoming a comprehensive digital bank evidenced by the Klarna Card launch and expansion into savings and other financial products represents a strategic bet that diversification will reduce dependence on transaction-based BNPL revenue. However, this transition also introduces regulatory complexity and requires capabilities beyond Klarna's core competency, potentially creating execution risk that markets may not fully appreciate until the strategy matures.