Green Dot: Banking On The Boroughs

| About: Green Dot (GDOT)
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The stock action in Green Dot Corporation (NYSE:GDOT) isn't exactly matching the recent results of the company suggesting that investors are placing a large bet on the GoBank and check cashing initiatives. The actual results haven't improved much over last year, but the general perception has been they were better than expected after facing an onslaught of new competition in its market leading prepaid card segment.

Green Dot is focused on providing affordable banking for the masses. Its primary product is a reloadable prepaid debit card that is available at more than 60,000 retail stores nationwide and online. It has several new initiatives including the recently launched GoBank, Project Outreach and another wave of retailers expanding the retail locations by another 20,000 stores.

Impressive Q2 Results

While year-over-year metrics weren't anything to write home about, Green Dot had a very successful quarterly report as it overcame new competition and higher risk controls compared to last year. The company estimates the combined impact of those two problems reduced revenue by 20%, yet it still provided these solid results:

  • Non-GAAP total operating revenues increased 4% to $142.6 million for the second quarter of 2013 from $137.6 million for the second quarter of 2012
  • Non-GAAP net income increased 4% to $14.8 million for the second quarter of 2013 from $14.3 million for the second quarter of 2012
  • Non-GAAP diluted earnings per share was $0.33 for the second quarter of 2013 versus $0.32 for the second quarter of 2012
  • EBITDA plus employee stock-based compensation expense and stock-based retailer incentive compensation expense (adjusted EBITDA) increased 10% to $29.6 million for the second quarter of 2013 from $27.0 million for the second quarter of 2012

The fact that the company was able to report higher earnings than last year surprised both analysts and management's own projections. Analysts had expected earnings to dip to only $0.29 for the quarter, but the transition period to a highly competitive market has led the company to be overly conservative on guidance. Over the last four quarters, Green Dot has exceeded estimates each quarter by a wide margin. As an example, the Q4 2012 estimates of $0.21 were exceeded by nearly 50%. Hence, investors should take the guidance and declining earnings estimates for Q3 and Q4 with a grain of salt.

Strong Metrics

The prime reason the company has continued reporting exceptional results in the face of an influx of competition from the American Express (NYSE:AXP) Bluebird to the Chase (NYSE:JPM) Liquid card has been the ability to turn existing customers into more frequent users of the prepaid cards. Most of the key metrics involving users per active card jumped. Though increasing risk controls did reduce revenue potential, it probably didn't impact earnings to a great extent if those accounts would've involved a high level of write-offs due to fraud. Even more important is the focus on quality customers increasing the revenues and probably profitability of each customer. The below slide from the earnings presentation highlights the big gains per active card:

Off the top, the revenue increase of 5% per active card definitely benefits the top and bottom line. The other metrics all grew over 12% compared to last year though those numbers don't have the same direct correlation to revenues. The volumes do suggest a more tuned in customer base likely to stick around longer now that direct deposit is being utilized.

Project Outreach

The company has a new initiative to reach beyond typical retailers such as Wal-Mart (NYSE:WMT) to further reach the underbanked. The strategic priority is to get prepaid cards and bank accounts to new customers and involves working with the nation's largest Community Based Financial Service Centers or check cashers. The first target is New York City where a lot of the traditional retailers aren't active in the five boroughs of the metro area that Green Dot is targeting.

The cash checking locations to soon have Green Dot products include RiteCheck, David's Check Cashing, and Pay-O-Matic, which combined account for 50% of the check cashing market in New York City. The company expects to use this city as a test market with plans to expand to other metro areas based on successful outcomes. One can only imagine cities such as Chicago, Los Angeles, Boston, and Detroit to name a few needing these services.

Revolutionary Mobile Bank Launched

The stock has soared from $10 to $25 over the last ten months based to a large extent on the plans for GoBank. While the company didn't provide a lot of details in the earnings call, it does seem pleased with the results over the first three weeks after rolling it out in early July.

The innovative mobile centric bank without branches was launched on June 25 with several retailers on board for promotional distribution including Rite Aid, and Barnes & Noble College bookstores. In addition, the company formed a national partnership with MetroPCS to distribute the mobile app across compatible Android devices.

The biggest question that went unanswered from the earnings call relates to the potential revenue contribution from GoBank. Analysts actually only forecast a roughly 5% gain in revenues next year yet one could reasonably expect a much higher contribution from the new bank and the check cashing initiative. From the outside, the potential appears enormous though no hard numbers continue to make it difficult to model the financial impact.


The perplexing part of an investment decision in Green Dot is now the valuation prospective. The stock trades at over 20x current year earnings even with the numbers declining from 2012. The stock has surged in part due to better results than expected yet the earnings multiple appears maxed out even including the $240M in unencumbered cash.

In order to properly value the stock an investor would need a better estimate of the revenue potential from a bank that is in some ways targeted to the younger generation that doesn't exactly provide a huge revenue stream. Analysts only forecast earnings growing 13% in 2014 making the stock probably ready for a pullback or at least to stall at these levels. Remember that earnings estimates currently have the company reporting $0.22 in the next two quarters compared to year ago numbers of $0.29 and $0.31, respectively. Those numbers are not typically conducive to higher stock prices from this level.

The below 2-year chart shows how the stock has completely recovered the collapse back in 2012 due to the lowered expectations for 2013 based on the higher competition and risk controls:


Green Dot has done an exceptional job navigating the higher competition from American Express at the primary retail location of Wal-Mart plus a step up in commissions to that retailer on existing business. Unfortunately for investors now looking to get into the stock the numbers don't add up anymore. Unless investors have a big conviction that GoBank or the Project Outreach move into the New York City boroughs will lead to significant revenues in 2014 and beyond, the stock is no longer attractive after a 150% gain from the October lows. Surviving the onslaught of issues that popped up in 2012 is one thing, but growing earnings going forward could be a totally different issue to justify a stock price above $25.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.