(Note: This article was originally published on our marketplace service on 30th May 2022.)
During the month of May, all of our fintech companies reported earnings and held investor events. It was nice to hear from the management teams from the businesses within our business of owning businesses. For today’s update, I want to highlight some of the developments taking place within the businesses of Shift4, Marqeta, and Affirm.
About 6 months after the formal addition of Shift4 to the Goldilocks Portfolio, our conviction in Shift4 has grown. 6 months prior, Shift4 had just announced its partnership with SpaceX’s Starlink and when we first examined Shift4 in our Deep Dive, we identified a significant opportunity for Shift4 to see a three to four times lift in profit margins as it moves its acquiring business fully in-house. Fast forward to now, Shift4’s in the process of acquiring Finaro, a smart global payments acquirer, which will enable Shift4 to launch its end-to-end platform internationally. To illustrate the benefit of the Finaro acquisition, Starlink was already a Finaro customer prior to the Shift4 acquisition, while Finaro makes it seamless for Shift4’s customers like Starlink to process payments across the globe. (More on the Finaro acquisition here)
The Finaro acquisition is incredibly exciting as Shift4 distributes its payment platform internationally, but Shift4 still has ~$180B in volume on its gateway platform, which represents a massive opportunity to convert end-to-end volume. Shift4 should do ~$75B in end-to-end volume for 2022, growing at 60%+ annually, while Starlink’s growth also benefits Shift4.
Converting gateway customers to end-to-end customers will result in a major boost to Shift4’s revenues and bottom line as it estimates that ~75% of its current gateway volume will ultimately move to the end-to-end platform or pay Shift4 as if they were.
I would emphasize, like I think this [converting gateway volume to end-to-end volume] is going to have a material impact on the second half of the year. This is going to have a material impact on our entire trajectory because, one, it is pulling forward a lot of volume that I think a lot of people - a lot of volume and revenue that probably forecasted over a multiyear period of time. But the other thing is just the amount of resources. We have nearly 2,000 employees. And I talk a lot about, hey, 50% of our resources are spent maintaining connections to our competitors in the past.
Like the better question is what percentage of your resources today are working on SpaceX Starlink, or your St. Jude connection or building out your international road map, and it's like probably single-digit percentages. And that's where we have to shift this. This is why taking out the parts is so important because this kind of philosophy allows you to free yourself from some of the drag of the past to focus on building the organization you want to be for tomorrow.” - Jared Isaacman
Shift4 continues to demonstrate resilience while its core business should generate strong unit economics for the rest of 2022. Shift4 recently authorized its second $100M share repurchase program, while Shift4 was strategic in raising capital over the past 24 months.
When Shift4’s CEO was asked why the company is profitable and where Shift4 will be investing, here was his response:
I can tell you why we are because I started the company in my parent's basement, didn't take any outside capital until 2014, 15 years after the company started. So I think I've been through dot-com, Great Recession, I understand what the world looked like when there was no like availability of low-cost capital out there. I think we balanced it all. It's why we didn't yes, we raised well over $1 billion in cheap cash last year and did not deploy because valuations didn't make sense despite like a lot of pressure to do things that didn't make sense. I mean, Taylor and I were just talking yesterday morning is like as dramatic as times are in the market right now, this actually like makes sense to me, like I understand how to run a company during these times. Like what didn't make sense to me and or Taylor last year was why 50x revenue multiples would make sense. I didn't understand why pictures of mutant apes could cost a couple of hundred thousand dollars.
Like this is like what we know - we know exactly what to do in this scenarios like this. And I think like having our roots going back to where they were, Taylor especially too, with more than a decade at Blackstone, like we understand fundamentals. I think like we're in a pretty opportune time right now with an awful lot of cash. I mean even with buybacks going on, we still have over $1 billion in cash right now. We're profitable. We're going to make a lot of cash in the second half of the year. And organizations that weren't operating responsibly or we might be able to find some attractive assets out there.” - Jared Isaacman, Shift4 CEO
Shift4 continues to be one of the more exciting fintechs as it supports the payments for SpaceX, ~40% of the hotel and restaurant industry in the U.S., while it’s implementing changes in its business model to bring its acquiring-processing fully in-house. Shift4 is also led by Jared Isaacman who has a profound amount of experience running a company and he’s one of the longest-tenured CEOs in the industry.
Shift4 is becoming more and more similar to Stripe or Adyen, specifically for complex payment environments, and as Shift4 grows its end-to-end volumes, it will generate similar margins as these larger players. In three to four years Shift4’s end-to-end volume could very well be between $250-$350B, which would result in a significant boost in Shift4’s operating income. I plan to elaborate on the Shift4 comparison to Adyen in a future note.
Now, onto Marqeta and Affirm.
Jason Gardner came up with the vision for Marqeta (MQ) in 2009 and the company was started in 2010. Marqeta has 12 years of operating experience at scale and Marqeta’s built an immense amount of trust with great companies at a large scale, as Marqeta processed over $130B in volume over the past 12 months. More than 50% of Marqeta’s top customers use the Marqeta platform in more than one country, as Marqeta makes it easy for its customers to roll out functionalities in regions where Marqeta operates (up to 44+ markets).
Marqeta operates on the issuing side of payments and Marqeta pioneered Modern Card Issuing, while it created technology and coined the term Just-In-Time Funding. This technology now supports solutions for companies like DoorDash and enables Coinbase to offer its crypto card. For more on Marqeta’s early days, I recommend this note where we explored Marqeta’s journey to finding product-market fit.
Lithic was founded in 2014 while Unit was founded in 2019. Marqeta has a first-mover advantage when it comes to Modern Card Issuing, but Marqeta’s volume is less than 1% of total card volume just in the U.S. Marqeta has a major advantage when it comes to operating at scale compared to other tech companies in the space, but this would not be clear based on their valuations.
There are thousands and thousands of acquires worldwide and acquiring is not programmable, while there are only a few hundred issuer processors which are programmable. Issuing is where the ledger is, and the issuer processors are ultimately responsible for managing fraud and guiding where the money flows or settlement. This is highly complex.
Settlement is like shoveling snow in a blizzard with people throwing rocks at you… Acquiring is very different. It’s not programmable, you can introduce four lines of code into your website if you ultimately want to do eCommerce. It’s not - it’s complex, but issuing processing is orders and orders of magnitudes complex. And that’s why in the beginning when I said I wanted to go build an issuing processing system from scratch, people thought I was absolutely nuts to go and do it.” - Jason Gardner
This ultimately gives Marqeta deep moats. For example, Marqeta is Affirm’s issuer processor and Marqeta enables Affirm to offer its full gamut of financial products in the form of a card. Marqeta enables Affirm to offer its wide range of products (from instant payments to longer duration loans) at non-integrated Affirm merchants as Marqeta allows Affirm to offer its full range of products within the Visa network. The Affirm Chrome extension and Debit+ are supported by Visa’s network, while it’s Marqeta which is the “system of record” that enables Affirm to guide its consumers to an appropriate financial product, whether Split Pay or another loan product. Marqeta will benefit from the widespread distribution of Debit+ if Affirm’s successful in scaling the product (more on this below).
Marqeta announced a partnership with Alviere, a European embedded finance company that looks to help brands and enterprises deliver financial services to their customers and employees. The partnership with Marqeta enables Alviere’s enterprise clients to issue branded cards in the European Economic Area (EEA).
Marqeta continues to gain distribution as its customers look to roll out new revenue sources leveraging Marqeta’s platform. Marqeta will look to use its $1.6B in cash to boost its product roadmap through M&A. All of Marqeta’s volume is organic (not from previous mergers) which demonstrates the company’s ability to develop and grow from within, but as valuations in the private markets become more attractive, Marqeta could very well acquire a company soon. More on potential acquisitions and Marqeta’s latest quarter can be found here.
Last Wednesday, during Affirm (AFRM) CEO Max Levchin’s fireside Q&A at the JP Morgan 50th TMC Annual Conference Call, he announced that Debit+ will be licensed out to any debit card issuers, so now regional banks or credit unions that don’t have access to the yields that credit card issuers have, they will be able to tap into Affirm’s tech stack. This will enable debit card issuers to offer consumers the ability to use their debit cards with the ability to borrow on a transactional basis.
This is massive. Massive as a means for distribution for both Affirm and Marqeta. This is exciting because it is an opportunity for Affirm to launch a completely new revenue stream by white-labeling Debit+ and the underlying technology. However, in the last 10 seconds of the clip in the Tweet above, Max describes his vision where Affirm’s Debit+ is one of many branded versions of Debit+. Moving forward, the brands that Affirm’s partnered with could very well look to launch their own version of Debit+ where they partner with an issuing bank and use Affirm’s tech stack to launch their own branded version of Debit+.
For example, Walmart did away with its layaway program before the last holiday season, while it could turn to Affirm to launch a branded version of Debit+. Walmart could offer its customers better financial services and tailored rewards for consistently shopping at their store. This is an extremely enticing development as large merchants will look to better engage their consumers and develop better insights into their customer base. As Amazon and Shopify continue to roll out new Affirm products as part of large roadmaps, it will be interesting if they eventually look to offer branded versions of Debit+.
Affirm is just getting started and there remains a lot of work ahead, but Affirm’s ability to demand higher take rates is a testament to the fact that Affirm produces quality assets. I recently released an in-depth note exploring Affirm’s business and illustrating what would happen if we were to enter a high inflationary environment or a recession caused by higher rates. I will also attach Louis's latest note highlighting Affirm's moats.
We are continuing to monitor our fintech battleship very closely. We feel as if this is an area where we truly know what we own, we understand the management teams, and the business models, from how these companies go about raising capital to deploying it, to ultimately gaining distribution. In regard to our other fintech holdings, there are many that trade at very attractive valuations that I didn’t highlight. I look forward to covering more of these companies in the upcoming weeks, specifically Block, Mercado Libre, and Upstart.
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Disclosure: I/we have a beneficial long position in the shares of FOUR, MQ, AFRM, UPST, SQ either through stock ownership, options, or other derivatives. 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.