Like a lot of payment stocks, fintech player Marqeta (MQ 0.93%) has been heavily sold off over the past year amid economic uncertainty. Marqeta's technology platform manages flexible physical and virtual card programs across a range of applications, from fintech companies to food delivery companies, and from enterprises managing employee spending to retailers that want to manage their own card programs for customers.
And if higher interest rates and a slower economy weren't enough, starting this upcoming quarter, investors can look forward to seeing Marqeta's revenue get cut in half.
Sound ominous? Actually, it may be the opposite. Two insiders just made big bets that the stock will go higher.
A new contract with Block will shake up Marqeta's top line
The big revenue drop investors are about to see isn't all bad news. In fact, the reason behind it is good: Marqeta, which garnered 78% of its revenue from Block (SQ 2.32%) last quarter, just renewed its contract with the company. The old contract was set to expire early next year. The new one will last for four years, through June 30, 2027.
Since Block accounted for so much of Marqeta's volumes, it's a huge relief that the contract was renewed. However, the contract renewal means there will be two big effects on Marqeta's results.
First, Block will be able to get a more favorable take rate, or the fee it will essentially have to pay Marqeta for managing the successful Cash App card programs. Block had already earned itself the lowest fee among Marqeta's customers, so its portion of Marqeta's gross profits were lower than revenue, at around 50%. But this new contract will take things to another level. Of note, Marqeta typically lowers its fees with customers as they spend in increasing volumes on the platform.
Second, as part of the contract, Block will now be directly responsible for negotiating with and paying the large card networks such as Visa and Mastercard.
This is important, because Marqeta used to have to manage that relationship and pay those costs. That resulted in an unpleasant surprise earlier this year, when Marqeta's relationship with two large customers changed in a way that didn't earn as many incentives from Visa. So even though Marqeta's customers were paying lower fees from higher volumes, Visa stopped giving Marqeta its expected incentives, squeezing margins this year.
Now Block will be dealing with Visa and Mastercard, so Marqeta essentially won't have to pay those fees. However, the rub is that a large part of its revenue will also go away, because of the accounting change. So Marqeta isn't essentially losing any gross margin from the change in accounting, but the change will result in a big drop in revenue.
However, because of the renegotiated fee with Block, Marqeta's gross margin per dollar of Block's gross merchandise volume (GMV) will reset about 40% lower as a result of the discounted fees. But that's a one-time reset that won't change for four years.
Investors and insiders give the thumbs-up
As a result of all of this, Marqeta expects revenue to be down 49% to 51% in Q3, with about 85% of the decline due to the accounting treatment. However, the remaining 15% impact from lower pricing will also be felt. Gross profit will be down 9% to 11%, with a percentage impact from the Block renewal in the mid- to high 20s. So absent that, gross profit would have been up in the mid- to high teens. And adjusted EBITDA margin will fall from slightly positive last quarter to negative 9% to 11%.
All of this might seem pretty bad, but Marqeta's stock actually rose after the earnings release. What's more, two members of Marqeta's board of directors bought significant amounts of stock on the open market the following week.
On Aug. 15, director Judson C. Linville bought about $200,000 worth of Marqeta stock at $5.86, while another director, Godfrey Sullivan, bought about $1.18 million worth of stock at $5.88 that same day.
Image source: Getty Images.
Why insiders may be bullish
The reset from the Block contract comes on the back of other contract renewals made late last year, which had already been affecting Marqeta's gross margin in 2023. For instance, Marqeta's GMV grew at a very healthy 33% last quarter, which is fairly remarkable given the difficult economy. However, revenue grew by only 24% and gross profit only 8%, a result of not having lapped these new contract resets, as well as the Visa issue. Block's strong growth also skewed results, as it already earned a lower gross margin than all other customers.
Yet with the Block contract now reset, a large portion of Marqeta's business has been renegotiated for the next three or four years, which means gross profit improvement will probably be tied more to GMV growth in 2024 and beyond.
A 2024 acceleration is baked in
Meanwhile, ever since new CEO Simon Khalaf took over earlier this year, Marqeta's bookings and pipeline have accelerated. On last quarter's conference call with analysts, Khalaf noted that Marqeta's bookings over the past three quarters were up 150% relative to the same period in the prior year. The bookings were evenly distributed between new customers and existing customers expanding their use cases with Marqeta. This seems to show that Marqeta's unique platform is winning over a wide range of customers.
When Marqeta signs a deal it qualifies as a booking, it can take up to six months for a commercial customer to launch, and up to a year for a consumer-facing card program to launch, and then they ramp after that. So all of these recent bookings should only begin hitting revenue and profit in 2024.
Khalaf noted on the call:
[I]f you then see the new sales kicking in and us lapping some of these, all the renewal activity that we've done, and we've said in the past a lot of these deals are more than three years. So, you're looking at deals that are pushing out '26, '27, '28. We think the combination of those two factors means we're going to get back to an exciting growth, and we will very quickly be adding profitability in chunks, right? It's not going to be this slow ascent. We should be able to deliver pretty strong gross profit growth without high expense growth, at least for a year or two to make a lot of progress in the profitability we can deliver.
Marqeta stock may be hard to value specifically with all these moving parts. However, the company has $1.4 billion in cash and equivalents, which is nearly half its $2.9 billion market cap. Stripping that out, its enterprise value of $1.5 billion in relation to last year's $320 million gross profit looks very undemanding, especially if growth pans out the way Khalaf believes.
With big renewals behind it, strong bookings to show up in revenue next year, a relatively low valuation, and insiders buying, Marqeta's stock looks awfully interesting at these levels.
