Marqeta (NASDAQ:MQ) Q3: Strong Sales, Gross Margin Improves

Full Report / November 07, 2023

Leading edge card issuer Marqeta (NASDAQ: MQ) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue down 43.2% year on year to $108.9 million. Turning to EPS, Marqeta made a GAAP loss of $0.10 per share, down from its loss of $0.10 per share in the same quarter last year.

Marqeta (MQ) Q3 FY2023 Highlights:

  • Revenue: $108.9 million vs analyst estimates of $95.4 million (14.1% beat)
  • EPS: -$0.10 vs analyst expectations of -$0.09 (10.1% miss)
  • Free Cash Flow of $38 million is up from -$26.1 million in the previous quarter
  • Gross Margin (GAAP): 66.6%, up from 41.8% in the 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.

Payments Software

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

After many quarters of strong growth, Marqeta's business has been sliding down recently.

“Our Q3 results represent the new baseline for Marqeta, post Block’s Cash App renewal. We've shown continued sales bookings momentum against a backdrop of operational discipline, continued scale, and new innovations through the launch of our credit platform,” said Simon Khalaf, CEO of Marqeta. “We are in a good position to return to strong growth by Q3 2024 as we lap the Cash App contract and expect to accelerate that growth in future years as the market for embedded finance continues to materialize.”

Marqeta Total Revenue

This quarter, Marqeta's revenue was down 43.2% year on year, which might disappointment some shareholders.

Looking ahead, Wall Street was expecting revenue to decline 40.2% over the next 12 months before the earnings results announcement.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 66.6% in Q3.

Marqeta Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Marqeta's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Marqeta's free cash flow came in at $38 million in Q3, turning positive over the last year.

Marqeta Free Cash Flow

Marqeta has generated $12 million in free cash flow over the last 12 months, a decent 6% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from Marqeta's Q3 Results

With a market capitalization of $2.7 billion, Marqeta is among smaller companies, but its $1.3 billion cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by Marqeta's strong gross margin improvement this quarter. We were also excited its revenue outperformed Wall Street's estimates, depite the drop in absolute numbers and its free cash flow improved. Zooming out, we think this was a decent quarter. The stock is flat after reporting and currently trades at $5.37 per share.

Is Now The Time?

Marqeta may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for everyone who's making the lives of others easier through technology, but in case of Marqeta, we'll be cheering from the sidelines. Its revenue growth has been strong over the last two years, though we don't expect it to maintain that historical pace. And 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.

Given its price to sales ratio based on the next 12 months is 6.2x, Marqeta is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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