EC Marqeta’s IPO Is Priced Beyond Perfection

At the midpoint of its expected June 9 IPO price range ($22/share), Marqeta (MQ) is valued at roughly $12 billion and earns our Unattractive rating.

We think the stock is worth no more than $9 per share. Marqeta’s expected valuation of $12 billion implies that the company’s total processing volume (TPV), a key industry metric, will be 114% of PayPal’s (PYPL), a highly unlikely outcome given PayPal’s vast infrastructure and strong brand recognition. Editor's note: Marqeta closed its first day of trading at $30.52.

Marqeta competitors, such as PayPal, have greater scale and distribution networks and generate enough cash flow to support investing in new technologies.  Marqeta has been unable to turn a profit.

Marqeta depends too heavily on just one customer, Square (SQ), for its revenue. In 2020, 70% of Marqeta’s revenue came from Square, which is up from 60% in 2019. If that relationship were to sour, Marqeta’s stock could suffer greatly. 

Despite the expensive price tag for Marqeta’s IPO, new investors will have almost no say over corporate governance. Insiders will hold 99% of the voting rights after the IPO.

The firm’s non-GAAP EBITDA understates its losses, and we’re not sure we can trust the rest of the financials given the material weakness in internal controls over financial reporting disclosed in Marqeta’s S-1.

We see no reason for investors to buy this IPO at its expected valuation of $12 billion. We believe a share price under $9 offers a more reasonable risk/reward dynamic for investors.

Revenue Growth, Shrinking Losses, But Still No Profits

Marqeta loses money, though its losses are improving. Net revenue grew 103% year-over-year (YoY) in 2020 and Core Earnings[1] improved from -$123 million to -$47 million over the same time. The company’s return on invested capital (ROIC) also remains negative, while rising from -34% in 2019 to -19% in 2020.

Small Share of a Large Market

Marqeta provides the backend tools to enable its customers to create, distribute, and manage physical, virtual, and tokenized payment cards. Its customers include some of the most well-known “tech disruptors” in the world, such as Square (SQ), DoorDash (DASH), Instacart, Affirm, and Uber (UBER).

In 2020 (the most recent data provided by the firm’s S-1), Marqeta’s platform processed $60.1 billion in TPV, which is up from $21.7 billion TPV in 2019. According to the firm’s S-1, its 2020 TPV equates to less than 1% of the $6.7 trillion worth of transaction volume conducted through U.S. card issuers in 2020. In other words, Marqeta has significant room to grow its market share as it grows customers and expands offerings.

Investors may further be enticed by this IPO given the expected growth in digital payments. As noted in the S-1,

  • Visa (V) estimates that from 2016-2022, the share of global retail commerce conducted online will more than double from 9% to 19%
  • Euromonitor projects electronic payments will represent 46% of the total global transaction volume by 2025, which is up from 31% in 2017
  • McKinsey estimates alternative payment methods will make up 60% of global digital commerce by 2023.

Significant Incumbent Opposition

Marqeta faces competition from some of the largest payment processors in the world, including:

  • Global Payments (GPN)
  • Fiserv (FISV)
  • Fidelity National Information Services (FIS)
  • Wex (WEX)
  • PayPal
  • Ayden
  • Stripe

Scale Disadvantages

Most of these incumbents have a major distribution advantage over Marqeta based on relationships across the globe with large card issuers such as banks and credit unions. While exact market share isn’t available for all competitors, we can compare different aspects of Marqeta’s business to its competition to get a sense of its scale disadvantages. For instance:

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Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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