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Marqeta is Trailing Its Rivals and Is Way Overpriced

Payments processing firm, Marqeta (NASDAQ:MQ) popped on its initial public offering (IPO), closing 13% up and a share price of $30.52. The company raised $1.23 billion,at a valuation of just over $16 billion. The company sold approximately 45.5 million shares of its Class A common stock at $27, above its target price range of $20 to $24. In this article, we will discuss some of the key operating results of the company and its future prospects.

Marqeta is Trailing Its Rivals

IPOs are generally unprofitable, yet, the climate of low interest rates and low growth has led to a more forgiving environment for unprofitable IPOs. This is because, with growth being so scarce, the premium on growth has risen. I believe that the fundamentals of a business should matter and the evidence suggests that in the long run they do. In this regard, Merqata has not covered itself in glory.

The company’s S-1/A filing shows that it combines world class revenue growth with an inability to generate profits. In 2020, the company grew net revenue year-over-year by 103%, growing net revenue from $143 million in 2019 to $290 million in 2020. Historically, only 5.5% of firms across the world earn a one-year revenue compound annual growth rate (CAGR) of 45% or more. However, as we said, Marqeta’s revenue growth is profitless: the company’s net loss attributable to shareholders was $48 million in 2020, an improvement from 2019’s $122 million.

An asterix has to be attached to the revenue numbers: though Marqeta has an impressive portfolio of clients, among whom are Affirm, DoorDash, Instacart, Square and Uber, 70% of the company’s net revenue was attributable to Square in 2020, a rise from 60% in 2019. Regardless of Square’s impressive credentials, this level of concentration is obscene.

Logically, a company that does not earn its shareholders any profits is a value-destroying company. Marqeta’s return on invested capital (ROIC) in 2020 was -19%, an improvement from -34% in 2019. The payment’s processor’s after-tax profits (NOPAT) margin was -16% as of 2020.

These numbers fall short of the operating results of its peers. Marqeta’s balance sheet efficiency, measured in terms of invested capital turns, is superior to that of its rivals with the exception of PayPal. In terms of ROIC and NOPAT margin, Marqeta trails its rivals. 

Company NOPAT Margin Invested Capital Turns ROIC
PayPal 15% 1.5 23%
Wex 12% 0.3 4%
Fiserv 14% 0.3 4%
Global Payments 16% 0.2 3%
Fidelity National Information Services 10% 0.2 2%
Marqeta -16% 1.2 -19%

Sources: New Constructs, LLC and Marqeta’s S-1/A filing

Marqeta is Overvalued

The company’s share price is overvalued. Indeed, even its initial targeted stock price range nwas overvalued. Price is a signal of expectations and at the midpoint of the company’s initial stock price range, $22, the market expected Marqeta to earn a NOPAT margin of 13% (compared to the -16% it earned and the 13% that is the average of its peers), and grow net revenue by 42% compounded over an eight year period, a growth rate which would beat the rate that the digital payment market is expected to grow by. The market’s expectations further imply that the company would earn net revenue of $4.8 billion, which is 16x what the company earned in 2020, and 64% of what global payments have done in the trailing twelve month (TTM) period.

The company’s intrinsic value is closer to $9 than it is to its current share price. A great investment is one which you can leave alone for years, all the way till you enjoy elderly day programs, content in the knowledge that your investment is safe. Marqeta is not a safe investment. 

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