Marqeta is a high-quality business whose product is fairly simple.
The company has taken what was previously a fragmented, on-prem product and vertically integrated it as a cloud-native solution. This has allowed the product to find various use cases beyond cards.
MQ's technology has been integral in the creation of arguably the most successful consumer finance app ever, i.e., Cash App by Square.
We will review Marqeta's Q1 2023, which went fairly well, *but* the business, in my eyes, has clearly poised itself to do *exceptionally* in the years ahead.
I emphasize this because I believe Q1's earnings call was a watershed moment. As Mr. Milotich, Marqeta's CFO, remarked on the call, "2023 is an inflection year for Marqeta."
As one piece of evidence for this, Marqeta, Inc. (MQ) booked as much business in Q1 as it did in the entire second half of 2022. This is clear evidence of progress being made in Marqeta's formerly beleaguered GTM motion.
And the company's guidance for the second half of 2023 and into 2024 (gross profit growth of 20%+, then 30%+) substantiates this progress as well.
The company is also in the process of reducing its workforce by 15%, which will serve to create even greater operational efficiency (read: operating leverage) within the business.
The company has also continued to "proliferate its use cases," which has been our "1 liner" investment thesis in our most recent Weekly Top Idea installments for Marqeta.
In short, it is plain as day that Marqeta has poised itself to create immense operating leverage, vastly stronger growth (akin to Adyen N.V. ( OTCPK:ADYEY ), which we've been expecting for almost years now), and a brilliant decade ahead from an equity appreciation perspective.
Marqeta Investor Relations
What Is A Marqeta?
To begin our time together today, I'd like to spend a few moments reviewing Marqeta's business.
In short, Marqeta has simply vertically integrated the issuing side of the payments ecosystem and put this vertically integrated product/platform into the cloud.
It is a fairly straightforward business in this sense, and Marqeta, in a sense, merely runs the "La Quinta Inn strategy" from the Peter Lynch's playbook in One Up On Wall Street . (If you'd like to further understand this strategy, I would encourage you to read One Up On Wall Street or follow up with me in the comments section or privately. I contend it's the most important investment strategy to understand, and Mr. Lynch would likely agree).
Pictorially, we can understand this reality as follows:
Yes, It Is An Adyen Chart, But I've Come To Own Just As Much Adyen As Marqeta, And I Believe There Is Room In This Very Abundant Universe For Both To Succeed Profoundly
Adyen Investor Relations
As we can see, Marqeta, as well as Adyen, which, as I just mentioned, is a great business, has vertically integrated the various point solutions on the issuing side of the payments ecosystem.
It has vertically integrated the various point solutions of the issuing side of the payments ecosystem, while also building and offering this vertically integrated product in the cloud.
The cloud native nature of Marqeta's platform has afforded it the ability to further define the "embedded finance" industry, which is the idea that virtually every company on earth is a financial company, and said companies can become so via a neatly packaged API from Marqeta.
This makes Marqeta's total addressable market ("TAM") truly as large as the company's execution and imagination. Of course, execution and imagination do not always come easily, and there must be rigorous application of both over time.
To close out this succinct illustration of Marqeta, the company has, indeed, vertically integrated the many point solutions of the legacy issuing stack, and it has designed this vertically integrated product such that it is cloud native.
Between vertical integration and cloud-native architectural design, Marqeta has created a product that has attracted some of the largest and most innovative businesses on earth, e.g., Citigroup ( C ), Klarna ( KLAR ), Affirm Holdings ( AFRM ), Ramp (huge Founders Fund success), Uber Technologies ( UBER ), Walmart ( WMT ), Coinbase Global ( COIN ), and BILL Holdings ( BILL ) (and Divvy, which Bill acquired), and it continues to partner with innovative, forward-thinking, and growing businesses to this day:
Marqeta's TPV Growth + Notable Customer Adds By Year
Marqeta Investor Relations
Note: We can see that Square launched with Marqeta in 2016. It has taken about 7 years to reach the scale at which it currently operates.
This is notable because, while Marqeta is a brilliant platform, patience is needed for even its 2019 partnerships to fully scale.
That said, 43% of Marqeta's gross profit (non-Square), i.e., $150M TTM, is growing at 45%+ (as of Q4 2022), so we're making good progress.
With many of Marqeta's customers finding themselves very early in their growth journeys, including Block ( SQ ) as it further expands internationally, and considering Marqeta's differentiated, vertically integrated platform that could be sold to virtually every enterprise on earth in some form or fashion, I see no reason the above-illustrated growth of TPV should stop.
I see no reason the business can't continue to add marquee customers such as Bill.com or Affirm or Uber or Coinbase or Klarna.
But while I see no reason TPV growth should stop, the reality is that business is not a perfect science. There are humans behind the realities I share with you, and these humans are imperfect.
For Marqeta, this is no different; by which I mean Marqeta has struggled to properly configure its GTM motion & team since going public; however, I believe that Marqeta has rectified its GTM shortcomings which it very evidently had when it went public (such as like when Wall Street gives you $1.5B for effectively nothing, and your product is totally adored by the brightest, most innovative minds. I think this could create a bit of complacency, and we've likely seen as much).
But... as we talked about in our review of Palantir Technologies (PLTR), this is nothing a little "fastest repricing of credit since 1788 + the 2nd, 3rd, and 4th largest bank failures" can't fix!
And, indeed, I believe it has done wonders in fixing Marqeta's culture, which now appears to be firing on all cylinders atop a brilliant product and atop a brilliant infrastructure.
In short, I believe a beautiful future for Marqeta awaits, and, today, I will share data and language with you that communicates as much!
Starting With The Bad
Below, we can see that Marqeta's gross profit growth has effectively stopped.
Marqeta's Q1 2023 Investor Presentation
This is the bad in its entirety in some sense. Gross profit growth, as of today, has basically stopped.
Now, had we not owned Marqeta for nearly two years at this point, this may come as a surprise to us, but we have owned the business, indeed, for nearly two years, and, as a result, we understand why Marqeta's growth rate has come crashing down to such a prodigious extent (relative to how incredibly attractive the core platform/product is and relative to the company's guidance for 20%+ gross profit growth late 2023 and 30%+ gross profit growth in 2024 and beyond).
It is clear to me that the effects of Mr. Jason Gardner (founder and former CEO) not properly staffing his C-Suite and not properly configuring an aggressive enough GTM motion are now being revealed in Marqeta's financials .
But, just like our own lives, sometimes we need to make adjustments whereby we optimize for the long term. Sometimes, we get things wrong in the near term.
I don't know about you, but I do not believe that this should merit the total termination of the business, nor the culture, nor the society, nor the individual.
I believe that this is what the concepts of "grace" and "forgiveness" were designed for: they are, in a sense, social lubricants whereby society full of very, very imperfect people can actually function harmoniously.
To this end, Beating The Market has given Mr. Gardner grace for his poor decisions around staffing his C-Suite and his GTM motion.
We have faith that Mr. Gardner has the competence to set Marqeta on the right track, as he has done consistently for the last 10 years.
But, notably, he's now far from alone (when Marqeta went public, he was much more insular).
In fact, I'd wager that, if we could peer into Mr. Gardner's mind, this has been arguably the easiest period in Marqeta's history, in that the company has an almost befuddling amount of cash on its balance sheet , especially if we consider that cash balance relative to total market cap at present ($1.5B in cash, including impact of Power acquisition, and $2.375B in market cap).
$1.5B in cash and no long-term debt is almost ridiculous, truly, and I would invite you to study some of the software and payment giants of today in their early years for context. This note is already quite long, so we will not do that today.
The company has profound product market fit.
The company has its most vertically integrated, automated, and comprehensive platform in its history.
And it has had 18 months during which to marshal its forces whereby it begins its sales campaign globally.
And it has done just this! And I have the data to prove it. To wit (emphasis added):
Second, in terms of how we go to market, the changes we made to the sales organization over the past six months continue to pay off. After a strong end to 2022, our bookings in Q1 exceeded our target. The number of deals closed in Q1 was approximately the same as the number of deals we closed in the entire second half of 2022, a testament to the built up demand for our services, our strong competitive position and improvement in sales operations, all accomplished without a material increase in headcount. While it usually takes 6 to 12 months to translate these bookings into material gross profit, the strengths of our bookings gives us a good leading indicators of growth for 2024."
This is exceptionally heartening. And it substantiates Marqeta's CFO's guidance for 20%, then 30% gross profit growth in the future (emphasis added):
Mike Milotich: If you think about even this year, even with a lot of renewal activity, we're - our gross profit growth, we expect to be in the mid-teens. And as that includes, as you mentioned, roughly five points coming from the change in the Visa incentive. So if you take that out, we would have grown around 20% even with heavy renewal activity.
So, if we look at going into next year with accelerated sales and diversifying our business , we're - we feel good about growing at that rate if not a little stronger [20% gross profit growth). Whereas it's still our goal to grow gross profit on a regular basis of over 30% and we'll obviously talk a lot about 2024 in a couple of quarters.
Mike Milotich Khalaf, CEO, Marqeta's Q1 2023 Earnings Call.
In a recent investor presentation, Mr. Simon Khalaf, Marqeta's new CEO, shared:
Pipeline grew 80% in US since Q4 and 40% in EU since Q4, and we've taken 20 days out of the sales cycle in 6 months."
Notably, we can see how growth will stall in Q2 2023, then reaccelerate slightly into the mid teens for the full year 2023, then breach 20% growth rate in Q4 2023; after which, Marqeta expects to sustain 30%+ gross profit growth, which would be in line with the growth rates of peers like Adyen...
...and which would be in line with my expectations since we bought the dang company!
With these ideas in mind, the following quote was articulated by Marqeta's CFO, and I believe it represents a watershed moment for the company.
We, as shareholders, have been very patient. We have given grace when things have gone wrong. We did the work. We did the due diligence. Marqeta is a fantastic business in my eyes. Now, it is time for the future to reveal as much (emphasis added):
We ended the quarter with approximately $1.5 billion of cash and marketable securities. Our Board has authorized a share repurchase program of up to $200 million. We believe that our current valuation does not properly reflect the following.
One , the expansion of our market opportunity with the emergence of embedded finance.
Two , our differentiated product platform with the comprehensive offering of debit credit, money, movement, risk control, and program management for consumer and commercial use cases.
Three , sales momentum driven by our renewed go-to-market motion. And four, increasing expense discipline and a healthy investment capacity that will limit future expense growth.
(Let's get out there and sell the best card issuing platform on earth, baby!)
Now let's shift to our Q2 and full year outlook. As a reminder, although a Block renewal is a top priority for us, and we would like to secure renewal in 2023, the various Block contracts run beyond this year. Therefore, we cannot indicate a potential impact to our financial performance until renewal is done and have assumed current contracts are in place throughout 2023.
We do not anticipate any impact to our service, products and operations primarily for three reasons.
One, we plan to be hyper focused on a relatively limited number of opportunities we feel will generate the most value for customers and therefore the highest return on investment. Second, the major components of our platform are already in place, debit, credit risk and authentication and banking and money movement solutions. And third, we have a significant - we've made significant progress on our automation and tooling efforts that make us less dependent on large numbers of people to complete important tasks.
Similar to revenue, we still expect 2023 gross profit growth to be in the mid-teens. We expect Q3 growth to be in the mid-teens and then accelerate into the low-20s in Q4 in alignment with accelerating revenue growth.
[Recall that Mr. Milotich guided for 30%+ gross profit growth in 2024, which, again, in my eyes, should be base case, as I've always believed since we originally began our partnership with Marqeta.]
To wrap up, our strong Q1 performance across both financial and operational indicators has us on track to accomplish our goals for this year. Marqeta is at an inflection point in 2023 with exciting progress on several dimensions.
I would highlight three in particular:
First, improvements to our go-to-market approach are driving a significant acceleration in bookings, which coincides with the massive broadening of our market opportunities due to the emergence of embedded finance.
[Boom!]
While we will still focus on specific FinTech verticals, embedded finance is a horizontal trend cutting across a wide variety of industries, making almost any company with an engaged user base and potential customer. Our highly flexible and configurable platform operating at a scale for consumer and commercial use cases is tailormade to serve the demand. The bookings will take several quarters to impact the P&L, but are a strong indicator of future growth.
The integration of Power's credit program management capabilities by the end of June, less than five months after completing the acquisition is a foundational addition to our single-stack platform. We will serve the full spectrum of credit, including B2B seller financing, consumer credit building, charge cards, transaction underwriting, and revolving credit.
Our pipeline suggests the opportunity to innovate is large and moving quickly. Again, another positive sign for future growth.
[Nice!]
Lastly, we are making meaningful progress on operational efficiency, reducing waste, and the use of professional services, leveraging our scale and optimizing technology usage and incorporating automation and tooling efforts all to accelerate our path to profitability. Our restructuring in Q2 will only enhance our focus on key priorities to sustainably deliver customer and shareholder value.
Mike Milotich, CFO, Marqeta's Q1 2023 Earnings Call.
A Few Charts
There's not much that need be said about these charts, as they are quite straightforward, but for your situational awareness whereby you generally gather where Marqeta is headed, I included them:
Marqeta's Gross Profit Continues To Grow Despite Challenges
Q1 2023 Marqeta Investor Presentation
With our foundation now very firmly laid and with evidence to substantiate that (aforementioned pipeline growth and corresponding gross profit guidance), I am very excited for the above chart!
Marqeta's Revenue Continues To Grow Despite Challenges
Q1 2023 Marqeta Investor Presentation
Notably, revenue has outgrown gross profit, and this is due to Square continuing to scale in an almost unbelievable fashion. As companies scale with Marqeta, they receive "bulk purchase" discounts. This is akin to what companies experience when purchasing bulk compute and/or storage from Amazon's ( AMZN ) AWS.
Marqeta's TPV Continues To Grow Despite Challenges
Q1 2023 Marqeta Investor Presentation
And we can see, the bulk discounts reality quite clearly above: TPV grew gangbusters, but about half did not flow to gross profit.
This is a clear illustration of bulk discounting, which is normal and natural.
It may be one part competitive pressure, but the same could be said for the brilliant business that is AWS.
This discounting at scale is important to lock in Marqeta's and AWS' best customers (it also represents an embedding moat); as such, I believe it represents Marqeta and Mr. Garnder doing the right things for customers and, by extension, customers.
Use Cases Are Proliferating
Each week, in Beating The Market's Weekly Top Ideas series, I share a "one liner" investment thesis.
For Marqeta, it oscillates between "Use Cases Proliferating" and "$1.5B in cash and no long term debt." Both are incredible components of this attractive business.
In this vein, Marqeta's call truly delivered on the "Use Cases Proliferating" front. To wit (emphasis added):
In addition, our pipeline for accelerated wage access is also rapidly growing. Another area where we're seeing traction in embedded finance is within marketplaces. This is an environment where money is constantly moving between supply and demand, creating the perfect scenario for financial tools to keep the ecosystem running smoothly. Marqeta makes a great marketplace partner because of the myriad of solutions we can offer: seller financing, accelerated seller payouts, bonus sale lending for consumers, co-branded cards and banking as a service just to name a few. During the quarter, we signed the partnership with an online employment marketplace where healthcare job seekers are matched with employers. Marqeta's powering a spending card linked to a loyalty program for workers placed using the platform. In addition to driving loyalty, the program enables better tracking of placement data. Also, employers only need to fund the cards when they're used to make a purchase optimizing their working capital outlet."
Simon Khalaf, CEO, Marqeta's Q1 2023 Earnings Call.
To explore this new and very, very exciting use case, let's now turn to a discussion between community member LongWins and myself. (Thank you, sir, for being so great to our community! Forever grateful! )
Use Cases Are Proliferating II: An Insightful Exchange With LongWins, Community Member Of Beating The Market
LongWins: Louis, I listened to MQ's earnings call last night. Now, I can understand your continued bullishness. Simon and Team did a great job! Evidently, slowing transaction in BNPL sector has impacted revenue and margin, unlike what we saw in Q4 2021. Consequently, revenue from SQ went up 2% to 76% of total MQ's revenue.
[I would insert here: gross profit concentration has held steady, so no cause for concern about the increased concentration here. The 43% (gross profit) business is still giant and growing very rapidly (much faster than the 57% (gross profit) business, i.e., SQ)]
Continued execution of their GTM to grow non SQ revenue will help reduce Rev concentration and drive up margin due to better pricing. Square is really in control here, they continue to get sweet deal that no one else gets (sweet deal means lower margin for MQ).
Glad to hear about new deals with banks. Marqeta is at an inflection point in 2023 with exciting progress on several dimensions and shareholders will be rewarded in 2024 and beyond.
Sitting on $1.6B in Cash and marketable securities Wow, that's is more than enough to weather any recession!!! … and a market cap of ~ $2.5B !!!! This is looking like a coiled spring!!!
[I agree.]
I expect revenue from BNPL sector to pick up from Q4 (holiday season), and into 2024. That sector struggles in this economy as evident in Affirm's and CO-hort's business performance.
[Boy, do we know it.]
Looking ahead, arguably, this could be the worst year in Marqeta's history as a public company, and they are holding up their grounds, doing everything (15% workforce reduction, improved operating expense, improving GTM to grow non-SQ revenue, and new product offerings penetration) to no just stand, but stand strong to survive, and then thrive!!!
Louis, I heard Simon said something on the call regarding a new feature "accelerated wage access." So, I have a lay man question, if my salary is made available to me few days earlier than my normal pay day schedule, who is funding it, and how does it benefit my employer besides driving employee loyalty?
To which, I respond:
Louis Stevens: LongWins, I think accelerated wage access is very exciting, and it's something that could be sold to effectively all 8B humans.
I believe the value is akin to what one of my little town's local insurance companies offers: "Great benefits that retain great talent."
Accelerated wage access has already started contributing to our gross profit growth. Not only has a number of active users quadrupled from the end of Q3 2022 to end of Q1, but TPV growth from the fourth quarter of 2022 doubled into the first quarter on a sequential basis."
Wow, new product! Another one! I am excited
Thank you for highlighting this, sir. It is very important through our TGI framework:
Beating The Market TGI Framework
[Indeed, with Power Credit, B2B credit products, new use cases, the growth of former new use cases, Marqeta's gargantuan cash hoard, etc., Marqeta operates from its greatest position of strength ever as a company, at least in my opinion. Notwithstanding this reality, it now trades at its lowest valuation ever as a company. This guarantees nothing of the future, but it is objectively wildly ironic.]
It is my belief that if we get even a murmur of SQ renewal, MQ re-rates to $10/share within a few weeks.
But I'm not totally unhappy with the pain. The pain is forcing aggressive action on further building out new lines of business.
If we can get SQ renewal + pain creating a host of new, exciting businesses, then we will have a "powder keg" of value creation set to explode in the 12 months ahead, irrespective of how bad the macro further gets.
"Download your employer app"
Within the employer app... let's say you work for TGT, MQ could power banking services directly from the app. TGT would need to assume no risk. MQ banking would port in... This would create incredible employee loyalty.
Imagine rewards customized for each employee. There's so much we could do here! Exciting!
I have faith in the process of Marqeta's evolution.
Our Q1 gross profit growth, excluding Block and Klarna, is almost three times higher than the overall company growth. While the Block revenue concentration has steadily increased over the past four quarters, the Block gross profit concentration has remained consistent. This is due to less favorable volume mix within the Block business for both purchase and ATM transactions combined with improving margins in the rest of the business.
Mike Milotich, CFO, Marqeta's Q1 2023 Earnings Call.
In the past, we articulated that there were two principal risks for Marqeta, though we also articulated the risk mitigants.
As of today, our risk mitigants for the first risk appear to have been deployed successfully, and we are now on the right track with a fully staffed C-Suite.
The second risk persists, though we can see in the above-quote that the "43%" (i.e., the 43% of the business' gross profits that are not Block) are growing gangbusters, and this should, at the very least, prevent Block from becoming a larger component of the company's gross profits.
Our mitigants for this risk have been:
Block has "10 teams" working on the Marqeta platform, and, when Block needs something built, it "turns to Marqeta." This has created the bulk discounts, which act as embedding moat for Marqeta.
This deep integration and corporate unity can be seen in the company's tickers: MQ/SQ. Two peas in a pod!
Marqeta has been the underlying tech for Cash App, a.k.a., arguably the most successful consumer finance app of all time! Marqeta did that!
Marqeta has a truly gargantuan cash hoard; to this end, should Block walk away from Marqeta, 1) it would still have the very rapidly growing 43% business (I kid you not: Marqeta might actually re-rate higher based on the growth rate of that business being revealed should Square, unlikely though it may be, sever ties), and 2) it would have more than enough financial resources to weather the storm, with its gargantuan cash hoard and no debt.
That said, I am highly, highly incredulous that Block severs all ties with Marqeta. Marqeta has been a brilliant partner to the business, and Marqeta powers Afterpay, portions of Square Sellers, Cash App, and more within the Square conglomerate. To this end, I believe the most likely outcome is that they simply re-up with Marqeta and continue executing brilliantly as they have.
I believe another more likely scenario could be that Square re-ups only a portion of its contracts with Marqeta (No company wants a partner to become an unelected board member, as can happen with AWS as well).
I believe the least likely scenario is that Square completely severs ties with Marqeta. It simply would not make sense, barring any egregiously scandalous acts from Mr. Gardner/Mr. Khalaf and his team.
In short, from $4.90/share, I believe Marqeta, Inc. stock could prove to be a fairly easy 10 to 20 bagger over the next 10-20 years.
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