IPO Watch - Investor Desk

Marqeta’s $1.2 Billion IPO: What to Know

Financial technology companies in particular have garnered significant investor interest this year, perhaps pushing more startups to gopublic. Two other payments-related companies, Flywire FLYW and Paymentus PAY recently went to market. Flywire’s stock jumped about 46% and Paymentus’ went up about 36% on their first day of trading.

Marqeta has scaled quickly, fueled by the growth of financial technology, e-commerce, and the gig economy. But its future is anything but certain.

Marqeta’s clients include familiar tech names like Square SQ, AffirmAFRM, Uber UBER, DoorDash DASH, and Instacart. These companies use Marqeta’s platform to build payment experiences for their own customers or streamline business payments.

What’s Behind Marqeta’s Strong Revenue Growth

Most of Marqeta’s revenue comes from transaction fees, so processing volume is the name of the game. Marqeta has benefited from the accelerated shift to e-commerce and digital payments brought on by COVID-19. The company’s total processing volume reached roughly $60 billion in 2020, up from $21.7 billion the year before, according to the Marqeta’s SEC filing. The momentum has continued into 2021; Marqeta says its platform processed $24 billion in the first quarter.

With the boost in processing volume, Marqeta brought in $290.3 million in revenue in 2020, more than double its 2019 revenue.

While the past year has been sweet for Marqeta in terms of revenue growth, we have to look at the numbers with a grain of salt because they may not be indicative of the future. COVID-19 has impacted consumer spending patterns, boosting online purchases and demand for delivery services and contactless payments. While the need for virtual payment processing and card issuing may continue to trend upward, the dramatic shift seen during the pandemic will likely subside.

Despite the boost in revenue over the past year, Marqeta isn’t yet profitable. The company has shown a decline in net losses in recent years but still lost $47.7 million in 2020.

Marqeta expects to incur losses for the foreseeable future as the company continues to invest in its growth. Ultimately, the future is uncertain. And Marqeta acknowledges in its SEC filing that it may never achieve or sustain profitability.

Marqeta Has a Dependency Problem

Marqeta’s growth over the past year has mirrored the performance of its customers, particularly payments processing company Square, which generates most of Marqeta’s revenue. Square was responsible for 70% of Marqeta’s net revenue in 2020. That percentage rose to 73% for first-quarter 2021.

Square’s rapid growth during the pandemic has been a boon for Marqeta, but Morningstar senior equity analyst Brett Horn sees risk in customer concentration: “This tends to be mainly a growth issue, as customers have leverage to demand better pricing.”

The current term of Marqeta’s agreement with Square for Square Card expires in December 2024, and the current term of their agreement with Square for Cash App expires in March 2024. There is no guarantee that the relationship will continue on the same terms.

Losing revenue from Square, whether from Square’s poor performance or a severance of the relationship, would also have an adverse effect on Marqeta’s business.

Market Tailwinds Can Benefit Marqeta and Competitors

Horn and equity analyst Michael Miller believe there are significant opportunities for companies like Marqeta to draft off the secular trend toward electronic payments, which would act as a tailwind to card payment volumes. Euromonitor International, a market research firm, projects electronic payments will represent 46% of the total global transaction volume by 2025, up from 31% in 2017.

Horn sees competition between traditional players relying on scale and better pricing while newer upstarts like Marqeta try to win with services that better fit higher-growth areas. Industry growth creates room for new players, but Horn ultimately believes scale is the best form of long-term advantage in the space. This benefits existing players, like FIS and Fiserv, and gives them a window to replicate new offerings.

Miller said the rise of buy-now-pay-later offerings is another major trend in the card payments space. Such offerings allow consumers to pay for retail goods under an installment plan. “These firms are more prominent in Europe and Australia, but they’ve been investing heavily in the U.S. to gain market share,” Miller said. “That said, in my view, they have a difficult path to significant adoption in the U.S. since they don’t have a clear benefit over existing credit card products already available in the country.”

Marqeta already supports providers in this space, like Affirm and Klarna, and Marqeta’s global presence (the company is certified to operate in 36 countries) would allow it to take advantage of this growth outside of the United States.

Marqeta’s potential markets are growing and evolving, and it will have to grow and evolve with them. Profitability will take a back seat as the company pursues further growth and innovation.

(Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

IPO Maximises Pexa’s Value but Link Fair Value Estimate Maintained

However, it appears Pexa will achieve an initial public offering, or IPO, enterprise value of AUD 3.3 billion, which is considerably higher than our prior AUD 2.20 billion valuation as of October 2020, and KKR’s now withdrawn AUD 3.10 billion enterprise value-based offer, made last week. It’s also 70% above the implied AUD 1.95 billion offered by the PEP/Carlyle Group Consortium in October 2020. Link’s board and executives have played their Pexa cards shrewdly to maximise value for Link shareholders which has significantly reduced the gap between Link’s share price and its fair value. All else equal, we’re indifferent as to whether this happens by selling the Pexa stake or via retaining the shareholding in a listed company. However, at the current market price of around AUD 5.20 per share, we still believe Link is materially undervalued.

We estimate Pexa has around AUD 150 million in cash, implying an equity value of AUD 1.52 billion for Link’s 44% shareholding at the IPO valuation. Media reports indicate Pexa will borrow AUD 300 million before its IPO and that most of Pexa’s cash will be returned to its existing shareholders. This implies around AUD 200 million in cash that will be attributable to Link, however, Link’s announcement indicates around AUD 150 million of this cash is likely to be reinvested into Pexa at the IPO to increase its shareholding to 47%. We expect the Pexa shares made available via the IPO will mainly come from the full sell-down of Morgan Stanley’s 40% shareholding in the company, with both Link and the Commonwealth Bank of Australia likely to increase their shareholdings.

The AUD 1.52 billion valuation of Link’s Pexa stake is a far better outcome than the AUD 1.14 billion we estimated Link would receive via a trade sale to KKR. However, unlike the KKR valuation, our IPO-based valuation excludes any deduction for capital gains tax. Quantifying the tax owed on the Pexa investment by Link is complicated under the IPO scenario because we expect Link will ultimately distribute its Pexa shareholding to Link shareholders via an in-specie distribution. We expect this option will enable retail shareholders to claim the 50% capital gains discount on their Pexa shares. However, we await the tax ruling on the Pexa shareholding and recommend Link shareholders seek independent taxation advice on this issue.

All else equal, Pexa’s AUD 3.3 billion enterprise value could increase our Link fair value by AUD 1.00 per share to AUD 7.90. However, due to the uncertainty regarding the details of the IPO, and particularly the tax implications for Link shareholders, we have maintained our fair value pending the release of additional information from both Link and Pexa. We also intend to reassess our Pexa valuation based on the IPO prospectus and management roadshow, and particularly the potential earnings upside from exploiting its data and overseas expansion.

We are also yet to determine the extent to which Pexa’s market value is incorporated into Link’s carrying value of the Pexa stake.

Link Administration Holdings Ltd Company Profile

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.