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Investment Thesis
Marqeta, Inc. (NASDAQ:MQ) is an emerging player in the payments processing space. It's competing against the on-premise legacy platforms such as Global Payments Inc. (GPN) and Fiserv, Inc. (FISV), as well as upstarts such as Stripe and Adyen (OTCPK:ADYEY). Nevertheless, MQ believes that its technology stack and scale are well ahead of its upstart rivals. In addition, it also considers its cloud-native platform superior, faster, and more scalable than its on-premise incumbents. As such, management believes that it's still in the early innings of a massive opportunity. Its continued product innovations and forays into credit card issuing, cryptocurrency, and tokenization opportunities with the large financial institutions also demonstrate its ambitions.
Despite that, the company continues to rely on its key investor, Block (SQ), for a significant amount of its revenue. In addition, its revenue is still concentrated in the BNPL space even though the company has been diversifying. Nevertheless, despite its robust topline growth, the company is still unprofitable. Moreover, it's also not expected to be profitable until FY25 on an adjusted EBITDA basis.
Its stock has also been buffeted since it went on a momentum spike bull-trap before its FQ3 report card. However, MQ stock has been on a downward spiral and is down 55% since its late October all-time high (ATH). We discuss what investors should look out for, as MQ stock seems to be consolidating.
Marqeta's Growth is Moderating, and Profitability Remains Elusive
As a high-growth stock, we are usually not so concerned with its profitability if it has consistently improved its operating leverage. Otherwise, it should be growing its topline massively, which can undergird its profitability outlook as it scales.
Marqeta revenue (LTM). Data source: S&P Capital, company filings
Marqeta guided for FQ4 revenue of $136.5M (mid-point). Therefore, the company expects to post revenue of $498.3M for FY21. There's little doubt that the company has posted phenomenal topline growth over the last two years. As a result, readers can glean quickly that MQ's revenue is expected to increase at a CAGR of 86.5% by the end of FY21. In addition, its YoY revenue growth is expected to be 71.7%.
Marqeta revenue and adjusted EBITDA mean consensus estimates. Data source: S&P Capital IQ
However, MQ is not expected to report adjusted EBITDA profitability over the next three years. Coupled with a potential deceleration in topline growth as seen above (CAGR of 30.7%), we can see why MQ investors may have bailed out recently. Notably, MQ stock traded for as high as 30.7x NTM revenue in early November, before its momentum fizzled out dramatically, as sellers took control.
Marqeta's Story is Exciting. But its Peers' Profitability Remain Unaffected
Marqeta has often emphasized that the company is here to disrupt the legacy on-prem players. But, it has been in this space for the last ten years, and it still couldn't generate GAAP operating profits. As growth is expected to slow over the next few years, we believe the market's attention may turn to its profitability. Notably, even though it has been trying to disrupt the legacy players, we have not observed a marked impact on their gross margins.
Marqeta and peers gross profit margins. Data source: S&P Capital IQ
Marqeta's gross margins are inferior to Fiserv's and Global Payments', whose gross margins have remained consistent. Therefore, the underlying strength in business models continue to look robust even as MQ has been scaling fast. It also shows that MQ is operating in a tremendous market opportunity that hasn't even troubled the market incumbents sufficiently yet.
Furthermore, Marqeta is confident that it can disrupt the incumbents as it can help its customers get up to speed much faster. CEO Jason Gardner articulated (edited):
So when companies use us, it's really about speed. For you to get up and running in a legacy system, it could take 9 to 18 months. But, we can get up and running with a customer within weeks. So, it is really about speed to market and in our experience in the verticals that we operate in to help customers really take flight, and ultimately their success, which is important to us. (Citi's 11th Annual FinTech Conference)
While we acknowledge that its business model and tech stack look exciting, its leading rivals' business models remain robust. Moreover, we believe that investors should consider the potential for consolidation within the fintech space, where the leaders may acquire upstarts to compete against MQ. Furthermore, we think that Marqeta's speed advantage could be transitory if newer upstarts can disrupt it, further encroaching on its unprofitable business model. For instance, Highnote "believes that many of the current solutions still take too long to provision, and ultimately are not that creative as products." Co-founder John Macllwaine emphasized (edited):
There is an incredible opportunity today to design a platform built for purpose, to fill the need for embedded finance, and to allow businesses to move more quickly. Marqeta is doing a great job illuminating the opportunities, but the platform was built 10 years ago and it was designed for a certain use case. They are where they are. (TechCrunch)
Therefore, while Marqeta thinks it's fast, Highnote believes it's not fast enough. It alluded that the company's platform has not kept up with the needs of the market as it evolves.
Moreover, the company still depends mainly on the leading BNPL players for its revenue. Notably, Block also accounted for 71% of Marqeta's revenue over the first nine months of FY21. We believe that the revenue concentration on mainly the BNPL players and Block is a significant risk as the leading BNPL players are mostly still unprofitable. Moreover, the Consumer Financial Protection Bureau (CFPB) is also delving deeper to assess the dangers of the BNPL business model. Such regulatory headwinds could continue to weigh on the MQ stock's momentum in the near term. Nevertheless, MQ has been diversifying its revenue streams to credit card issuing, and cryptocurrency. Therefore, we think it's critical for investors to continue monitoring its progress in these newer segments.
So, is MQ Stock a Buy Now?
MQ stock is currently trading at an EV/NTM Revenue of 12.5x, well above its peers median of 5.5x. Therefore, it's clear that the stock is still priced at a premium, despite falling 55% from its ATH. Moreover, the company needs to execute well on gaining operating leverage moving forward, while its peers are priced at less than half its revenue multiple.
Our DCF valuation model points to a stock that seems to be fairly valued.
| DCF Valuation Metrics | Estimates |
| WACC | 7.25% |
| Revenue estimate FY25 | $1.37B |
Adj. EBITDA estimate FY25 | $18M |
| Adj. EBITDA margin FY25 | 1.3% |
| Revenue exit multiple | 8x |
| Fair Value | $17.94 |
DCF valuation model. Data source: S&P Capital IQ, company filings, author
We derived an implied fair value estimate of $17.9 for MQ stock based on a reasonable revenue exit multiple of 8x. It's also above its peers' long-term median. Therefore, the stock looks to be fairly valued now. However, we believe the opportunity in MQ stock is still speculative, even though the stock seems to be consolidating currently. Therefore, we would require a considerable margin of safety if we wish to partake in its opportunity.
As such, we rate MQ stock at Neutral for now. We prefer to continue watching on how well the company can diversify its revenue streams first. We would be monitoring its competitive landscape closely, and also paying attention to the CFPB's ongoing assessment over the BNPL market.
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