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Marqeta (NASDAQ:MQ) Delivers Impressive Q3, Stock Soars


Full Report / November 09, 2022
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Leading edge card issuer Marqeta (NASDAQ: MQ) reported Q3 FY2022 results that beat analyst expectations, with revenue up 45.7% year on year to $191.6 million. Marqeta made a GAAP loss of $53.1 million, down on its loss of $45.7 million, in the same quarter last year.

Marqeta (MQ) Q3 FY2022 Highlights:

  • Revenue: $191.6 million vs analyst estimates of $180.9 million (5.92% beat)
  • EPS: -$0.10 vs analyst expectations of -$0.09 (6.55% miss)
  • Free cash flow was negative $4.78 million, down from positive free cash flow of $22.5 million in previous quarter
  • Gross Margin (GAAP): 41.8%, down from 44.9% 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 incredible over the last two years, growing from quarterly revenue of $84.3 million in Q3 FY2020, to $191.6 million.

Marqeta Total Revenue

And unsurprisingly, this was another great quarter for Marqeta with revenue up 45.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.94 million in Q3, compared to $20.5 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 25.5% 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 Q3.

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 we would like to see it start improving.

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 $4.78 million in Q3,

Marqeta Free Cash Flow

Marqeta has generated $25.5 million in free cash flow over the last twelve months, a decent 3.64% 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 Q3 Results

With a market capitalization of $3.74 billion Marqeta is among smaller companies, but its more than $1.64 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 Wall St’s revenue expectations. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 5.13% on the results and currently trades at $6.55 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 3.9x, suggesting that the market has lower expectations of the business, relative to the high growth 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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