Leading edge card issuer Marqeta (NASDAQ: MQ) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 30.8% year on year to $217.3 million. Marqeta made a GAAP loss of $68.8 million, down on its loss of $60.6 million, in the same quarter last year.
Marqeta (MQ) Q1 FY2023 Highlights:
- Revenue: $217.3 million vs analyst estimates of $211.8 million (2.62% beat)
- EPS: -$0.13 vs analyst expectations of -$0.10 (28.7% miss)
- Free cash flow was negative $14.2 million, down from positive free cash flow of $14.3 million in previous quarter
- Gross Margin (GAAP): 41%, down from 45% 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 into 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 exceptional over the last two years, growing from quarterly revenue of $108 million in Q1 FY2021, to $217.3 million.
And unsurprisingly, this was another great quarter for Marqeta with revenue up 30.8% year on year. On top of that, revenue increased $13.5 million quarter on quarter, a solid improvement on the $12.2 million increase in Q4 2022, and even a sign of slight re-acceleration of growth.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 18.9% over the next twelve months.
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 41% in Q1.
That means that for every $1 in revenue the company had $0.41 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Marqeta burned through $14.2 million in Q1, reducing the cash burn by 70.1% year on year.
Marqeta has generated $17.9 million in free cash flow over the last twelve months, 2.24% of revenues. This FCF margin is a result of Marqeta asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.
Key Takeaways from Marqeta's Q1 Results
With a market capitalization of $2.41 billion Marqeta is among smaller companies, but its more than $1.46 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
It was good to see Marqeta outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 1.81% on the results and currently trades at $4.34 per share.
Is Now The Time?
When considering Marqeta, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Marqeta is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
Marqeta's price to sales ratio based on the next twelve months is 2.5x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While Marqeta wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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