Marketa Stock Valuation Extremely Bullish (NASDAQ:MQ)

Marqueta (NASDAQ:NASDAQ: MQ) took off early on, closing 13% on its IPO [IPO], at $30.52. The payments processor raised $1.23 billion, after selling approximately 45.5 million shares of Class A common stock at a price of $27 per shares, above its initial price range of $20 to $24. The IPO valued the company at nearly $16.2 billion. I think the intrinsic value of the stock is closer to $9 per share, which makes Mareqta’s current valuation extremely optimistic. In this article, I will discuss Marqeta’s economics, valuation and outlook.

Operating results

As is common with many IPOs, Marqeta combines stratospheric revenue growth with an inability to turn a profit. According to its S-1/A filing, year-over-year, Marqeta grew its net revenue by 103% in 2020, with net revenue increasing from $143 million in 2019 to $290 million in 2020. According to research by Michael Mauboussin, only 5.5% of companies earn a compound annual growth rate in sales [CAGR] over 45%. Yet despite Marqeta’s world-class growth rate, its net loss attributable to shareholders has fallen from $122 million in 2019 to $48 million in 2020.

Even though the company has built an impressive customer base, serving clients such as DoorDash (NYSE: dash)Instacart (ICART), Square (NYSE:SQ)To affirm (NASDAQ: AFRM)and Uber (NYSE: UBER)its revenue is largely concentrated around Square, which in 2020 accounted for 70% of net revenue, up from 60% in 2019. Square is a great company but this degree of focus means the company’s fate is tied to that from a single customer.

Marqeta is a classic case of a company that destroys shareholder value. It is the return on invested capital [ROIC] was -34% in 2019, dropping to -19% in 2020. Its NOPAT margin is, unsurprisingly, negative, at -16%.

Compared to its benchmark class, i.e. its competitors, Marqeta’s results appear in an even harsher light. Marqeta has better balance sheet efficiency than all of its rivals except PayPal, measured in terms of capital turnover (which it scores 1.2), but in terms of after-tax profit [NOPAT] margin and ROIC, Marqeta’s operating results are lower than those of its competitors.

Sources: New Constructs, LLC and Marqeta File S-1/A

Marqeta strives to achieve minimum viable economies of scale

Asset growth effects are largely responsible for this combination of world-class revenue growth and destruction of shareholder value. In hyper-competitive markets such as Marqeta’s, where it is pitted against some of the world’s largest payment processors, such as Global Payments (NYSE: GPN)Fiserv (NASDAQ:FISV)Fidelity National Information Services (NYSE: FIS)WEX (NYSE: WEX)PayPal (NASDAQ: PYPL), Ayden and Stripe (STRIP), it is forced to grow rapidly in order to achieve minimum viable economies of scale, a point at which it will be able to break even and generate economic benefits for its shareholders. Indeed, the business model sacrifices short-term profits on the altar of growth, with the promise of future profitability.

Marketa Total Processing Volume [TPV] in 2020 was approximately $60 billion, compared to $21.7 billion in 2019. Marqeta’s market share in terms of total processing value is 1% of the $6.7 trillion in processing volume. transactions processed by card issuers in 2020. Out of charity, one could say that Marqeta has plenty of room to grow. Yet the other slide of having only a small part of a large and growing market is the lack of the economies of scale needed to be profitable.

The shift to digital payments will only make Marqeta’s addressable market more attractive. We know that the potential for large and growing economic profits attracts capital and new investment, driving up asset prices and perhaps even leading to excess supply, resulting in profits below the cost of capital. It is to be expected that Marqeta will struggle to make economic profits, despite, or perhaps even because of, the attractiveness of its market.

The processing volume is expected to increase significantly. According to Marqeta’s S-1/A filing, Visa estimates that between 2016 and 2022, the share of global retail conducted online will more than double, from 9% to 19%. In a similar vein, Euromonitor expects electronic payments to account for 46% of total global transaction volume by 2025, up from 31% in 2017. Marqeta believes the global Covid-19 pandemic has accelerated this transition to digital payments. They are probably right. Bain & Company echoes this confidence, estimating that a major effect of the Covid-19 pandemic will be that the percentage of global digital transaction volumes in 2025 will increase from 57% to 67%. Similarly, McKinsey says the pandemic has brought about half a decade of change that has happened in the space of a few months. McKinsey estimates that alternative payment methods will account for 60% of global digital commerce by 2023.

In this large and rapidly growing market, Maqeta has significant drawbacks that it can only overcome by increasing capital expenditure, which suggests that profitability will be far from good. All of its competitors have superior distribution relationships with credit unions and banks around the world. To get a sense of the difference in scale between Marqeta and its rivals, Fidelity National Information Services, for example, processes $9 trillion in global payments, compared to $60 billion in POS for Marqeta. Maqreta says it is available in 36 countries and has issued 320 million cards. Global Payments, meanwhile, has issued 680 million cards and is available in 100 countries.

Not only that, but Marqeta’s value proposition isn’t particularly unique. Fidelity National, Fiserv and Global Payments also help users issue virtual credit cards, as does Marqeta, which sees this as a key part of their value proposition. Lack of differentiation and lack of scale make Marqeta unlikely to achieve minimum viable economies of scale.

Conclusion

The stock price implies that the market expects Marqeta to be bigger than PayPal. As the above analysis has shown, Marqeta has huge downsides and is already underperforming PayPal by all significant metrics, including scale. In the middle of its already inflated IPO target range, ($22/share), the price implied that Marqeta would earn a NOPAT margin of 13% (which was the average NOPAT margin of its benchmark class, where Marqeta gained a NOPAT margin of -16%) and increase net revenue by 42% CAGR over 8 years, a rate that is more than double the growth rate that Grand View Research predicts the digital payment market will grow between 2020 and 2028. company would then earn $4.8 billion in net sales, 16 times what it did in 2020 and 64% of the last twelve months [TTM] revenue for global payments.

Marketa’s intrinsic value is $9 per share, which is significantly lower than its current valuation. This implies that over the long term, the company’s stock price is likely to fall, in line with many IPOs whose value drops in the first 6 months to a year of IPO. It’s not a business to invest in.