After reporting earnings last Thursday night, Green Dot (GDOT) plunged over 60% during trading on Friday. So did the company just die?
The company provides widely distributed, low cost banking and payment solutions to a broad base of U.S. consumers. Green Dot's products and services include its market leading category of General Purpose Reloadable (GPR/) prepaid cards and its industry-leading cash transfer network which are available directly to consumers online and through a network of approximately 60,000 retail stores nationwide where 95% of Americans shop.
For the most part, the company provides the prepaid cards available at Wal-Mart (WMT). This program accounted for 62% of revenue during Q2. The biggest fear is that Green Dot will no longer dominate the market as larger players in the banking industry enter the sector in mass.
Q2 2012 Highlights
The company reported the following highlights for Q2 2012:
- Non-GAAP total operating revenues increased 17% to $139.3 million for the second quarter of 2012 from $119.4 million for the second quarter of 2011
- Non-GAAP net income was $15.3 million for the second quarter of 2012 versus $16.3 million for the second quarter of 2011
- Non-GAAP diluted earnings per share was $0.35 for the second quarter of 2012 versus $0.37 for the second quarter of 2011
- EBITDA plus employee stock-based compensation expense and stock-based retailer incentive compensation expense (adjusted EBITDA) was $28.7 million for the second quarter of 2012 versus $29.1 million for the second quarter of 2011
Analysts expected $0.38, so the reported number of $0.35 was surprising for a company that typically beats estimates.
The company had a major guide down for the rest of 2012 due to fears of competition as major retailer customers plan on offering other prepaid options. In addition, new security measures are reducing the amount of new card activations as the vetting process becomes more complex.
As the company mentions, the potential exists that the competitive products will increase the overall sector. While some customers expect net unit sales for Green Dot to decline. The company now expects full-year operating revenues to grow to a range of $534M to $543M. Earnings are expected to be in the $1.29-$1.32 range.
These numbers are a significant reduction considering analysts expected around $1.70 in full-year earnings prior to the report. Not to mention that the first half earnings were $0.83. This amount only leaves $0.47 for the second half. Now earnings will be nearly half of last year's numbers, showing a significant reduction in year-over-year results as well.
Considering the company still forecasts a profitable second half, the stock reaction was very surprising. A stock typically wouldn't drop 60% unless the company discussed bankruptcy. Amazingly, the stock attempted to break above $30 earlier this year so the move down to $9 has been very dramatic and quick.
Competition remains the biggest issue. The company had previously made comments that new additions to the market would help increase the market and make Green Dot stronger. It appears the company is more worried about details of the plans shared by customers than originally expected. JPMorgan Chase (JPM) and Citibank (C) have both indicated a desire to issue prepaid cards. Whether this is the competition most feared or something else is not clear.
The company guided towards roughly $1 earnings run rate going forward. Considering that new competition isn't expected to hit until Q4 at the earliest, the valuation is very much questionable. The stock trades at an interesting multiple with the stock at $9, but it is impossible to know the real value until 2013 becomes clearer.
The company has many initiatives, especially around location- and mobile-based activities from the acquisition of Loopt earlier this year. That move has long-term potential, but won't be the savior short term. The bigger concern might just stem from the new controls designed to enhance security measures. Considering the concept of a prepaid card was to capture the unbanked, it appears that the risk controls will limit new card activations via the more stringent vetting process.
As the leading independent prepaid card provider, the company has the potential to be the long-term winner. The big banks will undoubtedly not have the same focus as Green Dot. Unfortunately, until the competition issue settles down, the stock is difficult to touch. Green Dot doesn't appear to have died, but that guidance sure raises a bunch of questions about the future.
Additional disclosure: Please consult your financial advisor before making any investment decisions.