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Green Dot's Short-Term Pain Appears Worse Than Expected

By Matthew Frankel, CFP® – Updated Aug 8, 2019 at 5:11PM

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The banking-as-a-service company’s second-quarter results shocked investors -- and not in a good way.

Financial technology and banking-as-a-service (Baas) company Green Dot (GDOT 3.88%) reported second-quarter earnings that -- to put it mildly -- disappointed investors. The morning after the earnings report, Green Dot's stock was set to lose more than 35% of its value, and this comes on the heels of a massive 26% drop after its first-quarter results in May. In all, Green Dot is trading for less than one-third of its 52-week high.

The first-quarter drop was due to the unexpected announcement that Green Dot would be dramatically increasing its technology and marketing investment activity, and this would result in lower profits in the near term. As CEO Steve Streit recently told me on The Motley Fool's Industry Focus podcast, the company is willing to endure short-term pain in order to make the right moves for the long run.

Young woman on mobile phone with dollar signs hovering over the screen.

Image source: Getty Images.

What went wrong in the second quarter?

At first glance, you might expect the stock to be up following Green Dot's second-quarter results. After all, the company's earnings and revenue both beat analyst estimates.

The problem is that it appears that the company will have a bit more short-term pain than investors had previously thought. Along with second quarter earnings, Green Dot lowered its full-year 2019 guidance yet again.


Q4 2018 Guidance

Q1 2019 Guidance

Q2 2019 Guidance


$315 million to $321 million

$255 million to $261 million

$240 million to $244 million

Adjusted EPS

$3.59 to $3.67

$2.82 to $2.91

$2.71 to $2.77


$1.114 billion to $1.134 billion

$1.114 billion to $1.134 billion

$1.060 billion to $1.080 billion

Data source: Green Dot earnings reports.

This represents a 5% year-over-year revenue increase at the midpoint of the current guidance range but declines of 12% and 17% in EBITDA and adjusted EPS, respectively. At the beginning of the year, Green Dot was guiding for 16% and 10% increases in these metrics. That's why the stock has been crushed.

Green Dot's reasoning for lowering guidance is that sales are declining in its legacy prepaid card product line (down about 500,000 active accounts year over year), and because the launch of the company's newest BaaS product is going to happen later than expected.

Can Green Dot recover?

To be perfectly clear, Green Dot's future is less certain now than it previously was. This is the case anytime companies sacrifice near-term profitability in pursuit of long-term growth drivers. As a result, Green Dot has become a higher-risk but potentially higher-reward stock.

Specifically, if the company's new products such as its 3%-yielding Unlimited Cash Back Account start to gain serious traction, or if the investments in the BaaS platform start to translate into new partnerships, it's entirely possible that Green Dot could end up being very cheap at the current share price. After all, Green Dot trades for just over 10 times forward earnings, and this is a company with double-digit annualized earnings and revenue growth in recent years.

GDOT Revenue (TTM) Chart

GDOT revenue (TTM) data by YCharts.

On the other hand, that is a big if, which is why the stock price has been punished. Only time will tell if the company's ambitious investment strategy will pay off, but for now, it's fair to say that the market isn't convinced.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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