Marqeta offers impressive growth, but Its reliance on block Is a Concern

Business Strategy & Outlook:

Marqeta has recently enjoyed rapid revenue and volume growth that has led to improving margins, though the company is still unprofitable. Marqeta’s operating cost structure is mostly fixed, so higher processing volume on debit and credit cards issued on its platform naturally leads to better margins for the firm, creating a road map for profitability as volume grows. The Marqeta card-issuing platform provides its customers with the infrastructure and application programming interfaces, or APIs, needed to build and rapidly deploy innovative card payment systems without preexisting payment expertise. The unique capabilities and flexibility of Marqeta’s platform has allowed it to find success with fintech and technology companies, with buy now pay later firms and Block being the most notable. Marqeta continues to benefit from the high organic growth its customer base provides, and the transition to digital payments as digital card issuance and tokenization are among its strengths, with major firms like Citi and JPMorgan using its digital issuance technology.

That said, Marqeta has a genuine problem with customer concentration. More than 80% of Marqeta’s revenue comes from its two largest customers, with Block alone accounting for around 65% of net revenue. This creates serious risk for Marqeta as either a loss of this relationship or a material deterioration in contract terms could have serious repercussions on Marqeta’s business model. Marqeta’s current agreement with Block lasts until 2024, giving Marqeta some breathing room, but the firm’s reliance on Block will be an ongoing concern as it is the company’s largest source of risk. In a more positive light, Marqeta has announced deals to create debit cards for Bill.com and Goldman Sachs’ Marcus—major wins for the company. It is also moving forward with plans to expand its international business and move into credit card issuance. While these efforts are still in their early stages, these plans along with its recent contract wins provides Marqeta with a potential road map to continue its rapid growth and address its concentration issues.

Financial Strengths:

Marqeta is in a very strong financial position, particularly after raising $1.2 billion in its IPO. Marqeta ended March 2022 with over $1.6 billion in cash and investment securities on its balance sheet. With no long-term debt outstanding, this provides the company with ample financial resources to invest back into its business, without the need to raise more capital. Additionally, Marqeta’s business requires little investment capital, even as it grows rapidly. The company is first and foremost a financial technology firm, and requires very little physical assets. Marqeta also collects interchange revenue from merchants before paying its customers their share, meaning the company has low net working capital requirements due to its high accounts payable. In fact, the company generated positive cashflow from operations in 2021 and used less than $50 million in 2022. This places Marqeta in the position of having substantial financial assets but little to no cash burn. While the company expects Marqeta to remain unprofitable for the immediate future, it also sees little risk of financial strain given the strength of its balance sheet.

Bulls Say:

Marqeta’s platform and open APIs for card issuance continue to attract large and sophisticated firms like Goldman Sachs’ Marcus and Google to its platform, highlighting the strength of its offerings.
Marqeta’s existing customer base includes disruptive firms like Square and Klarna, which provides Marqeta with strong organic growth from its existing user base.
Marqeta’s cost structure is mostly fixed, allowing the company to naturally expand its margins as volume grows.

Company Description:

Headquartered in Oakland, California, and founded in 2010, Marqeta provides its clients with a card-issuing platform that offers the infrastructure and tools necessary to offer digital, physical, and tokenized payment options without the need for a traditional bank. The company’s open APIs are designed to allow third parties like DoorDash, Klarna, and Block to rapidly develop and deploy innovative card-based products and payment services without the need to develop the underlying technology. The company generates revenue primarily through processing and ATM fees for cards issued on its platform.

(Source: Morningstar)

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