Marqeta: Time To Make A Mark

Summary

• Marqeta, Inc. has seen significant share price losses since its 2021 IPO.
• Losses are driven by high valuations and increasing losses, as top line sales trends remain quite healthy.
• The valuation reset has been significant, as an 80% loss in the shares understates the change in the enterprise valuation following a big cash position.
• Appeal is luring, but Marqeta, Inc. losses need to show some improvements in the near term.
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mihailomilovanovic

When Marqeta, Inc. (NASDAQ:MQ) went public in the summer of 2021, I noted that the technology/payment provider has seen a good reception by the market, with investors falling in love with such IPO names at the time.

Rapid growth was highly compelling, yet high valuations at large and a big reliance on Block, Inc. (then Square, Inc.) (SQ) raised eyebrows with me.

Recap To IPO Day

Marqeta, Inc. aims to become the standard for modern card issuing, allowing builders to bring innovative payment technology solutions. Modern card issuing is key in a digital world, ensuring that payments from apps end up with the company who sells the product or service, for instance to pay the driver or delivery guy.

Ensuring smooth operations for many platform companies, Marqeta counted many popular platform names such as DoorDash(DASH), Instacart (ICART), Klarna (KLAR), Square, and others as its clients. The promise of the business is that it would be much more nimble than the slow, complex and error-prone credit traditional card operators.

Built from scratch, Marqeta aimed to bring innovation to the actual cards, having 57 million active cards in use by 2020, processing over 1.6 billion transactions that year, as evidence of strong commercial traction.

The company went public at $27 per share as 530 million shares outstanding granted the company a $14.3 billion equity valuation at those levels, including a $1.5 billion net cash position. This meant that the market was applying a $12.8 billion operating asset valuation to a business which generated $143 million in revenues in 2019 on which an operating loss of $59 million was reported.

Sales doubled to $290 million in 2020, with losses narrowing slightly to $48 million, as the relative operating leverage has been quite pronounced. The composition of growth was good, as total revenue growth of 103% actually trailed a 173% increase in processing volumes, with revenues reported at 0.4% of the processed payment volumes.

Momentum was still solid in 2021 with first quarter sales up 125% to $108 million, for a $432 million run rate, still equivalent to 30 times annualized sales. First quarter losses trended around $10 million, as the operating loss rate was quite stable. The expensive valuation only worsened on the first day of trading, as shares rose to the $30 mark, as the company still relied on Square for 70% of its business.

All Downhill

Shares of Marqeta fell to the high-teens late in 2021 in sympathy with the rest of the IPO and technology market, which had seen a pullback late in 2021 already. Ever since, shares have gradually come down further, now trading at $6 and change, up around a dollar from the lowest levels seen over the past year.

Early in 2022, Marqeta posted a 78% increase in full-year sales to $517 million, with fourth quarter revenue growth maintained at 76% as revenues came in at $155 million, trending in excess of $600 million. Problematic is that loses have expanded as well, due to the public offering, which resulted in higher stock-based compensation ("SBC"), as the company posted a fourth quarter operating loss of $37 million and change.

First quarter sales for 2022 rose 54% to $166 million, albeit accompanied by a huge $49 million operating loss. Second quarter sales rose 54% to $187 million with operating loses narrowing slightly to $47 million, still translating into huge losses. Taking advantage of the strong financial position, Marqeta announced a $100 million buyback program in September, but this has hardly provided support to the shares.

Third quarter sales growth slow down to 46% to $192 million, with revenues now trending around $750 million. Disappointing is to see operating losses increase to $59 million and change, marking an end to the deleveraging seen in the second quarter, although the company warned for fourth quarter growth to slow down to around 30%.

With dilution now pushing up the share count to 549 million shares, the company still commands a $3.5 billion equity valuation at $6 and change. Included in this valuation is a more than $1.6 billion net cash position, for a $1.9 billion enterprise valuation, providing sufficient liquidity to fund losses for a while.

It also shows that if the company can stop the losses, the operating asset valuation comes in at 2.5 times sales, a modest multiple given the 30-40% growth, albeit that we are still a long way to achieving profitability. That said, third quarter results were hurt by some incidental expense items, pushing up losses during the quarter.

A Deal In 2023

Towards the end of January, Marqeta announced that it has reached a deal to acquire credit card management platform Power Finance in a $232 million deal which is payable in the next two years, with earned outs having the potential to increase the total deal value to $275 million.

Power was only founded in 2021, as no financial contribution has been announced. Given that the company has only been around for a short period of time, it seems safe to say that no meaningful revenue contribution could be expected as management indicated that the deal was driven by the need to gain additional capabilities in its core offerings.

Concluding Remark

The reality is that this latest Marqeta, Inc. deal seems to be one of a highly strategic nature and could be well-received over time. Marqeta's valuation is very modest, and now still includes a huge net cash position. Given the growing revenue base and pace of growth, this results in a reasonable sales multiple. Moreover, Marqeta has recently hired Google veteran Simon Khalaf as well for the top job, as that could spook hope for new operating momentum, but that remains to be seen.

Given all of this, it might just be the time to gradually become upbeat on Marqeta, Inc., albeit that losses remains steep, with no real path of break-even results seen yet. 2023 would be an opportune time to make progress on that front.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.