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Marqeta (NASDAQ:MQ) Q2: Beats On Revenue But Gross Margin Drops


Full Report / August 10, 2022
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Leading edge card issuer Marqeta (NASDAQ: MQ) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 52.6% year on year to $186.6 million. Marqeta made a GAAP loss of $44.6 million, improving on its loss of $68.5 million, in the same quarter last year.

Marqeta (MQ) Q2 FY2022 Highlights:

  • Revenue: $186.6 million vs analyst estimates of $180.1 million (3.62% beat)
  • EPS (non-GAAP): -$0.08 vs analyst estimates of -$0.11 (26.2% beat)
  • Free cash flow of $22.5 million, up from negative free cash flow of $47.3 million in previous quarter
  • Gross Margin (GAAP): 41.8%, up from 38.4% 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 year, growing from quarterly revenue of $122.2 million, to $186.6 million.

Marqeta Total Revenue

This was another standout quarter with the revenue up a splendid 52.6% year on year. On top of that, revenue increased $20.5 million quarter on quarter, a very strong improvement on the $10.6 million increase in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 30.2% 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 41.8% in Q2.

Marqeta Gross Margin (GAAP)

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 dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you follow 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's free cash flow came in at $22.5 million in Q2, turning positive year on year.

Marqeta Free Cash Flow

Marqeta has generated $23 million in free cash flow over the last twelve months, a decent 3.6% of revenues. This FCF margin is a result of Marqeta asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Marqeta's Q2 Results

With a market capitalization of $5.65 billion Marqeta is among smaller companies, but its more than $1.66 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth Marqeta delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. 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 2.08% on the results and currently trades at $10.81 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 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.

Marqeta's price to sales ratio based on the next twelve months is 7.2x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. 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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