2023-10-18 11:07:44 ET
Summary
- Marqeta, Inc. is a provider of customizable payment cards for the digital economy, but its non-Block business needs to grow to attract investors.
- Marqeta's near-term prospects rely on its ability to offer efficient card program management and customization through open APIs and cloud-based infrastructure.
- The company's Q3 results need to show strong growth rates and an increase in gross profits to justify its high valuation and attract new investors.
Investment Thesis
Marqeta, Inc. ( MQ ) is a provider of modern card issuing solutions, offering customizable payment cards tailored for the demands of the digital economy. Marqeta facilitates efficient management of card programs and transaction authorization.
The biggest question this business faces is this, can Marqeta's non-Block ( SQ ) business grow enough so that this business actually becomes enticing enough for new investors?
I believe the answer is yes, but I remain cautious that MQ stock is already richly priced. So, although I'm hopefully and tepidly bullish, I'm also aware that this business is far from blemish-free.
Marqeta's Near-Term Prospects
Marqeta functions as a leading provider of modern card issuing solutions, facilitating the creation of customized payment cards. Through its utilization of open APIs and cloud-based infrastructure, Marqeta enables efficient management and customization of card programs, transaction authorization, and payment settlement.
Its offerings, such as Managed By Marqeta and Powered By Marqeta, cater to diverse customer needs, providing a range of services from card program management to payment processing. Marqeta is dedicated to simplifying the complexities of the payments ecosystem.
Anyone reading about Marqeta will already be aware that Marqeta's business is highly concentrated, around 70% with Block, so I won't repeat this here as this has been already discussed amply on Seeking Alpha.
What we do need to discuss is whether Marqeta's ex-Block business can be compelling enough to attract investors into this name? Note, that I'm not referring to investors that are already fully entrenched and fully committed, I'm referring to new investors looking at this stock with fresh capital.
MQ Revenue Growth Rates Need to Shine in Q3 2023
Marqeta will report its Q3 results in less than 3 weeks ( expected November 7th post-market). And I declare that it will have to blow away investors with its strong growth rates. More specifically, the story will need to focus on the fact that Marqeta's ex-Block business growing quicker, and dramatically so, than the rest of the business, to distract investors away from Block's tight grip on Marqeta.
As it stands right now, investors have significantly rewarded Marqeta's shares for successfully renewing its deal with Block.
But I'm not confident that one can truly make the case that what Marqeta ultimately provides, which is card issuing solutions and transaction authorizations, is all that different from the malaise that's affecting its peers, for instance, Adyen ( ADYEY ) or Fiserv ( FI ).
In fact, the case could be made that Marqeta, at about 15% of the size of Adyen and significantly smaller than Fiserv, hasn't got the scale nor the financial resources to meaningfully take market share in this space, even if its balance sheet is debt-free.
And if that wasn't enough, consider these recent developments.
I've often stated to my followers, you don't want to be put in a place where you are having to fight the Street. By that I mean, that when you see analysts dramatically lowering their revenue estimates, that means that they've turned bearish on the company.
And one could make the case that this is a good time to be contrarian. But then again, I revert back to the argument that Marqeta's share price is anything but contrarian. In fact, as we've discussed it's already massively outperforming its peers.
Gross Margins Will be an Issue
Marqeta's gross margin was already an issue before the Block renewal. Now, it's expected to drop to around the high-20s% starting Q3 2023.
With that in mind, will investors truly be willing to continue paying a large premium for this stock?
As you can see above, investors are still paying around 3x forward sales for Marqeta. This multiple has been expanded since the start of 2023.
So, to summarize my investment case, I'm tepidly bullish on this company, but I want to see very strong growth rates and an uptick in gross profits to substantiate my investment case. If I see that after Q3, Marqeta's total gross profits are not growing at higher than 25%, I'll have to come clean and admit I made a mistake on this stock.
The Bottom Line
My current view on Marqeta's prospects is somewhat optimistic but cautious, considering the uncertainty surrounding its growth potential apart from its association with Block. I have reservations about the high valuation of its stock.
The recent emphasis on Marqeta's partnership with Block raises concerns about the appeal of its ''new'' renewed contract operations. The foremost challenge lies in the need to accelerate its revenue growth rates, particularly in its non-Block business, to generate fresh interest from potential investors.
Additionally, the anticipated decline in Marqeta's gross margin percentage only adds to the doubts surrounding the company's valuation. While my outlook remains hopeful, a significant increase in gross profits after the Q3 results will be crucial to confirm my positive stance on Marqeta, Inc.
For further details see:
Marqeta's Prospects For Delivering High Gross Profits In Q3