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Marqeta (NASDAQ:MQ) Reports Upbeat Q3, Stock Jumps 13.9%


Full Report / November 10, 2021
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Leading edge card issuer Marqeta (NASDAQ: MQ) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 56% year on year to $131.5 million. Guidance for next quarter's revenue was surprisingly good, being $136.5 million at the midpoint, 8.51% above what analysts were expecting. Marqeta made a GAAP loss of $45.7 million, down on its loss of $12.3 million, in the same quarter last year.

Marqeta (MQ) Q3 FY2021 Highlights:

  • Revenue: $131.5 million vs analyst estimates of $119.2 million (10.3% beat)
  • EPS (GAAP): -$0.08
  • Revenue guidance for Q4 2021 is $136.5 million at the midpoint, above analyst estimates of $125.7 million
  • Free cash flow was negative $12.5 million, compared to negative free cash flow of $12.5 million in previous quarter
  • Gross Margin (GAAP): 44.9%, up from 41.8% same quarter last year

Founded by CEO Jason Gardner in 2009, Marqeta (NASDAQ: MQ) is an innovative card issuer that provides companies with the ability to issue and process virtual, physical, and tokenized credit and debit cards.

The digitization and commercialization of electronic payments is accelerating as commerce continues to shift to online and mobile payments. Likewise, thanks to innovative products like Square almost any merchant can accept card payments while new business models have sprung up which involve multiple payments to multiple parties like Uber or DoorDash. However, legacy card issuers have been slow to innovate card issuing because their main customer bases were large financial institutions that didn’t demand expanded functionality.

Marqeta provides modern card issuing infrastructure that is open to developers, which enables businesses to develop modern, frictionless payment card experiences for consumer and commercial use cases that are either the core of their core business. Marqeta generates revenues from its platform’s usage: interchange and processing fees.

As might be expected, Marqeta’s customer base is largely comprised of digital-native businesses. Square uses Marqeta to offer Cash Card for its Cash App customers, which is a customizable Visa card that enables consumers to make purchases with funds in their Cash App stored balance. It also uses Marqeta for the Square card, which is a Mastercard debit card that enables merchants to make payments using their Square account balance. Marqeta also provides virtual card services for buy now pay later players like Klarna, Affirm, and Afterpay, which require cards to be issued to process payments to merchants for installment payments.

Consumers want the ability to make payments whenever and wherever they prefer – and to do so without having to worry about fraud or other security threats. However, building payments infrastructure from scratch is extremely resource-intensive for engineering teams. That drives demand for payments platforms that are easy to integrate and embed in consumer applications and websites.

Marqeta’s competition can be grouped into legacy card issuers such as Global Payments (NYSE: GPN), Fidelity National Information Services (NYSE:FIS), Fiserv (NASDAQ: FISV), and modern card issuing peers like Adyen (ENXTAM: ADYN), Stripe and Galileo who is owned by Sofi (NASDAQ:SOFI).

Sales Growth

As you can see below, Marqeta's revenue growth has been incredible over the last year, growing from quarterly revenue of $84.3 million, to $131.5 million.

Marqeta Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 56% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $9.24 million in Q3, compared to $14.2 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 28.9% over the next twelve months, although estimates are likely to change post earnings.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Marqeta's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 44.9% in Q3.

Marqeta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.44 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Marqeta's Q3 Results

With a market capitalization of $14.2 billion, more than $1.66 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by how strongly Marqeta outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is up 13.9% on the results and currently trades at $28.51 per share.

Is Now The Time?

Marqeta may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Marqeta is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from Marqeta given its price to sales ratio based on the next twelve months is 23.4x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Marqeta doesn't trade at a completely unreasonable price point.

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