about 2 years ago • 3 mins
Berkshire Hathaway posted record earnings over the weekend, because Warren Buffett always seems to have the right answer.
What does this mean?
The world economy was finally getting back on its feet last year, and conglomerate Berkshire Hathaway just sat back and reaped the rewards. The firm’s railroad business really, ahem… picked up steam, reporting a record profit as companies got back to moving goods around the world. That helped bring Berkshire’s operating profit up 25% to a record-breaking $27 billion in 2021. The firm’s investments soared last year too, including a $41 billion gain just from its Apple shares. Put all together, and Berkshire’s net income more than doubled to reach a record $90 billion. That’s a lot of records.
Why should I care?
The bigger picture: Berkshire has cash to spare.
All this, and Berkshire hasn’t even struck any big deals in the last six years. That’s mainly because Berkshire CEO Warren Buffett has been deterred by sky-high stock valuations, which he puts down to two years of cheap money fueled by low interest rates. Instead, the company’s been buying its own shares, including a – yep – record $27 billion worth last year. Even that’s barely made a dent in its cash pile: the company ended 2021 with $147 billion in the bank.
For markets: Stick with stocks.
Buffett also had some thoughts to share with investors in light of last month’s events. The Oracle of Omaha reckons the best way to build wealth in the long term is to invest in stocks, and warned against dumping them – as well as against hoarding cash and buying gold or bitcoin – in times of conflict. See, Buffett reckons the value of money will only go down during wartime, whereas stocks – which represent actual businesses – should eventually start growing again. In short, he sees this conflict-induced dip as a prime buying opportunity.
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Klarna reported a mixed earnings update on Monday, so maybe the Swedish buy-now-pay-later startup should’ve been more specific about the “later” part…
What does this mean?
With its most recent valuation putting it at $46 billion, Klarna holds the title of Europe’s most valuable startup. And it’s easy to see why: cash-strapped shopaholics can’t get enough of its interest-free loans, with the company adding 70% more active users last year to bring its total to 147 million. That helped push the total value of transactions on its platform up by 42% compared to the year before, and the firm’s revenue up by 38%. But it turns out shoppers like putting off their payments a bit too much: Klarna’s credit losses – those it sustains when users don’t pay back their loans – almost doubled to $487 million. Throw in rising admin costs, and the firm’s net loss was quadruple what it was the year before…
Why should I care?
The bigger picture: This is a crowded market.
Buy-now-pay-later (BNPL) really kicked off during the pandemic, and it’s showing no signs of slowing down: Worldpay estimates that the sector accounted for 2.1% of the total value of global ecommerce transactions in 2019, and that’s expected to hit 4.2% by 2024. But with huge growth comes huge competition, and Klarna has plenty of that: it’s not just up against dedicated BNPL firms Affirm, Paidy, and Afterpay, but banks like Monzo, Revolut, and Barclays too.
Zooming in: Klarna was built for a different world.
Klarna’s credit losses are worrying enough for investors, but there are arguably even bigger problems ahead. Klarna partly funds the short-term loans it offers by its own short-term borrowing, which works in a world where interest rates are low. But with most major central banks expected to raise rates and keep raising them for the foreseeable future, cheap money – and big profits – are going to become a lot harder to come by…
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