Marqeta achieved three major milestones in 2023 and could reap the rewards next year and beyond.
Of all the sectors affected by the post-pandemic period, the fintech sector has done just about the worst. New digital alternatives to traditional financial products have been widely adopted during the pandemic and their valuations have been even higher.
However, as the interest rate environment has changed, investors’ focus has shifted from growth to profits, alongside a slowdown in fintech end markets. This has led to a violent revaluation of most fintech players, with many of these stocks now trading between 75 and 95% below their all-time highs.
So the sector could be fertile ground for contrarian value plays these days. A name to watch is Marqueta (M.Q. -0.52%)a modern card issuing platform that went public in June 2021 at a price of $27 per share, then fell to an all-time low this year at $3.26 before rebounding to just over $6 today today.
But the company has made several significant improvements this year, completing a turnaround and paving the way for a potentially significant recovery.
The Marqueta platform
Marqeta’s technology stack allows customers to seamlessly integrate and modify the properties of virtual and physical debit and credit cards, a refreshing update to the tedious manual card issuance programs of the past. Using Marqeta’s flexible application programming interface (API) platform, customers can download cards extremely quickly while changing rewards, incentives and deposits on the fly.
This flexibility has made Marqeta a favorite among fintech neobanks, such as Block (S.Q. -1.06%)which uses Marqeta as the backbone of its Cash App consumer cards and Square business cards. Other early customers were new age, buy now, pay later companies. Marqeta’s platform also allows businesses to purchase on demand, for example when a Instacart (NASDAQ: BASKET) The buyer receives an exact amount downloaded to a card for a specific order.
These verticals slowed down after the pandemic, but Marqeta has skillfully pivoted into new use cases for more established businesses. For example, Marqeta has spotted large e-commerce marketplaces and retailers who would like to issue their own branded card without the customer having to go through a third-party banking website. Marqeta also makes expense management easier for employees making business-to-business (B2B) payments to suppliers.
Image source: Marqueta.
An innovative new use case is accelerated access to wages. That’s when instead of hourly employees getting paid once every two weeks, they can get an expense card as soon as they work a shift. This allows workers to save on credit card interest and bank overdraft fees, while increasing employer loyalty and reducing turnover. Meanwhile, Marqeta also shares interchange fees with the employer, mitigating the loss of working capital if employees spend their salaries early.
This is a great new deal, a win-win for both employer and employee.
2023 milestones: a new CEO, a major acquisition and a key contract renegotiation
2023 has been a memorable year for Marqeta, with milestones including:
- Simon Khalaf assumes the role of CEO, succeeding founder and president Jason Gardner.
- Marqeta acquires Power Finance, a credit issuing start-up that Marqeta has integrated into its platform.
- Renewed its contract with Block until 2028, which represented 78% of Marqeta’s revenues and just over 50% of gross profits before renewal.
Khalaf was an internal hire and was instrumental in righting the ship, pivoting Marqeta’s go-to-market strategy from fintechs to embedded finance within larger, established companies. Khalaf has held leadership positions at Yahoo!, Verizonand recently Twilio.
So far, Khalaf has been able to re-accelerate Marqeta bookings, while reducing staff and costs by $40 million to $45 million compared to 2022. It normally takes 12 to 18 months for a program to go up. in power, so Marqeta should see a reacceleration in gross margin in the second half of 2024 thanks to this year’s strong bookings.
The Power Finance acquisition took place last February for $223 million, payable over three years, with incentives for founders to earn up to $52 million more over time if certain criteria are met. are reached. As comprehensive as Marqeta’s platform was, it was still a primarily debit-focused offering, so Power Finance’s capabilities in flexible credit programs made it an ideal solution. This will also make it possible to offer integrated and credit-oriented financial products for non-financial companies. Incorporating Power’s technology, Marqeta just launched its credit platform at the end of October, which should help drive growth next year.
The great renewal of the Bloc
But perhaps the most important milestone of the year was the renewal of the contract with Block. Although the renewal raises a big question mark for Marqeta, the contract resulted in a drop in take-up, as well as a second accounting change that significantly reduced Marqeta’s revenue in a one-time “reset.”
The decline in revenue due to accounting is not of much concern, but the change in participation rate will reduce Marqeta’s gross margin in the short term. In the first partial quarter since Block’s contract renewal in August, Marqeta’s gross profit fell 9% despite a 33% increase in total payment volume (TPV).
However, Marqeta will begin completing the renewal in August 2024, when gross margin is expected to reaccelerate upward. In the first half of 2024, Marqeta expects the year-on-year decline in gross profit to narrow to between 3% and 6% before subsequently reaccelerating to a growth rate of 20%.
Image source: Marqueta.
Last August, after the contract was renewed, two of Marqeta’s directors purchased significant amounts of shares on the open market. Godfrey Sullivan bought nearly $1.2 million worth of stock at $5.88, and Judson C. Linville bought $200,000 worth of stock at $5.87. This is a show of confidence after the surplus from the Block contract has been removed.
Image source: Marqueta.
Recent and forecast financial performance
Not only is Marqeta expected to see an acceleration next year, but it also has a huge amount of cash on its books, to the tune of approximately $1.3 billion. Like 40% Marqueta market capitalizationit should serve as a solid floor for the stock.
Marqeta was fortunate to raise funding in June 2021 at the top of the fintech market, and this fortuitous timing allows it to invest in growth while share buyback. In fact, Marqeta is in the process of reducing its share count despite being a relatively young and growth-stage company. It’s very rare.
Image source: Marqueta.
Marqueta could be a long-term winner with a discount
Looking ahead, Marqeta is a pioneer in the technology card issuance space, with a capital-light business model, plenty of liquidity and a huge addressable market.
At the company’s recent investor day, Marqeta said it expects growth of more than 20% in 2025 and 2026, while making its net profit profitable in 2026. Although the company did not give no figures beyond this period, it seems like it always will. to be a significant player for the years to come after 2026. Given that Marqeta’s platform only accounts for a single-digit percentage of card transactions worldwide, there appears to be plenty of room to grow.
With a front enterprise valueWith a ratio of just under three, Marqeta shares still look far too cheap, given the growth opportunities and the very capable management team at the helm.