2023-08-09 11:34:21 ET
Summary
- Marqeta, Inc.'s Q2 results show that the company's fundamental prospects are not as strong as expected.
- Cash App makes up a significant portion of Marqeta's total business, raising concerns about its growth sustainability.
- The renewal of the Cash App agreement with reduced pricing raises questions about Marqeta's negotiating power and long-term strategy.
Rapid Recall
In my previous analysis titled, "Marqeta: Optimism Now Washed Out, Looks More Interesting," I said ,
I'd been bearish on this stock for some time. My thesis had been that this stock was overhyped.
However, today, given that Marqeta's ( MQ ) results show that the company's fundamental prospects are not quite as strong as many had hoped for, I believe that most investors find themselves somewhere between capitulation and despondency.
In other words, I believe that anyone that wanted to sell out of Marqeta would have probably already sold at any point in the past year when the stock was priced nearly twice as high.
While I'm not asserting a bullish rating on this stock just yet, I am watching it closely.
Marqeta just reported Q2 results , which make me tepidly bullish. Marqeta's quarterly results are not perfect, as there are still meaningful concerns on the bearish side that haven't gone away.
But the combination of low investor expectations, together with stock getting de-risked on the back of the Cash App renewal for a further 4 years, allows me to assert a buy rating on this stock.
So, let's get to it.
Revenue Growth Rates Are The Bull Case, With a But
Marqeta positions itself as a growth business. And yet, this is a business that has a lot of questions outstanding. The chief concern here is if Marqeta is such a compelling and growing business, why is it stuck contingent on Cash App from Block ( SQ ) practically to the exclusion of any other businesses?
To illustrate this, note that in Q2 of last year, Cash App made up 69% of its total business. And this time around, Cash App increased to 78% of Marqeta's total business. One doesn't need a business degree to understand the precariousness of this setup.
Furthermore, consider this from Marqeta's SEC filings,
We renewed our agreement with Block [...] In addition to reduced pricing, the renewal provides that Block will be responsible for defining and managing the Cash App program with respect to the primary Card Network going forward.
We expect the renewal to reduce reported net revenue and decrease gross profit.
The quote above speaks for itself. Block, Cash App's owner, has all the negotiating power in this business relationship. Leaving Marqeta with no leverage .
In the next section, we'll discuss Marqeta's profitability and how this contract positions Marqeta.
Marqeta's Take Rate is Cut by 40%
During Marqeta's earnings call , Marqeta made the case that the reason why businesses diversify their revenue stream is to provide stability, but that diversification also adds redundancy. Here is the quote:
[...] You distribute your load [revenues] on multiple providers so that you actually have some form of redundancy. We've addressed both as in like in the agreement which bake the economical incentive for us to capture the vast majority of the volume. Right and we've done a lot of work on the redundancy and the stability of the platform. And something we've demonstrated.
So there is, we've almost reduced the reasons for diversification almost to something non-existent.
I'm not entirely convinced of this justification. In fact, consider this excerpt from the SEC filings such as the just-filed 10-Q :
[...] the renewal provides that Block will be responsible for defining and managing the Cash App program with respect to the primary Card Network going forward. We expect the renewal to reduce reported net revenue and decrease gross profit.
What you see is Marqeta acknowledging that it's not negotiating with Cash App from a position of strength. Here's a further quote from the earnings call:
Looking ahead to Q3 and Q4 of 2023, we expect the gross profit take rate we earn on Cash App volume to be approximately 40% lower as a result of the renewal.
The quote above describes Marqeta having to have to reduce its prices by 40%. That's far from an alluring business, one that has to take a cut on its offering. Particularly such a large cut.
The Bottom Line
In my prior analysis, I was cautiously bearish on Marqeta, suggesting that its fundamental prospects might not be as robust as perceived.
However, the recent Q2 results have shifted my perspective towards cautious optimism. The company's focus on Cash App has raised concerns about its growth sustainability, as Cash App comprises a significant portion of its revenue.
Despite this, the renewal of the Cash App agreement with reduced pricing presents an unexpected twist, where Marqeta seems to lack negotiating power. This contract's impact on Marqeta's profitability is evident, raising questions about the company's long-term strategy.
While there are still bearish factors to consider, the combination of lowered investor expectations and the Cash App renewal allows me to consider a buy rating on this stock, albeit with reservations.
For further details see:
Marqeta Q2 Earnings: Cash App's Grip And The Cost Of Renewal