Over its lifetime, the S&P 500 has generated an average annual return of about 10.6%. That would suggest an investor needs to grow a portfolio at above that rate to have a shot at "beating Wall Street." A sector traders have been turning to lately to do just that is the fintech sector.
A recent report from ResearchAndMarkets estimates that the global market for digital payments could grow an average of 30% per year until 2030. But the financial technology industry is extensive and made up of many companies. How can investors be sure to capture this growth? Payments software company Marqeta (MQ 3.31%) could be the answer. Let's take a closer look at why this up-and-coming fintech stock has what it takes to produce market-beating returns moving forward.
Image source: Getty Images.
Powering the fintech sector behind the scenes
Digital payments go far beyond buying something from an online store or tapping your smartphone at a payment terminal and are becoming ingrained in the entire economy. You use them when you hail a ride or place an order for food delivery. Digital banks are popping up, offering new ways to manage your money, exchange money, and borrow.
But all these new finance-based technologies need to connect to the existing payment networks and banks to work. Marqeta powers these connections with its application programming interface (API) that lets fintech companies create custom payment solutions.
Marqeta's customer list is extensive and covers various industries, including household names in sectors like:
- Buy now, pay later: Affirm, Afterpay, Klarna
- Rideshare and food delivery: Uber, DoorDash
- Banks: Block, Coinbase, JPMorgan Chase
The company generates revenue by taking a small percentage of each transaction its technology powers. In other words, Marqeta grows with its customers. And some of these customers are rapidly growing, which is showing up in Marqeta's growth. The total value of transactions it powers, called transaction processing volume, grew 76% year over year to $33 billion in Q4 2021. This translated to $155 million in net revenue, up 76% from the prior-year quarter.
Deep pockets to support growth
Since going public, Marqeta's invested in further growth and dramatically increased its employee headcount. It's helping support large customers with upcoming product launches, like Affirm's Debit+ Card or the Coinbase Card, which lets users spend the crypto assets in their Coinbase account and earn cash-back rewards.
You can see in the chart below how the company's headcount has more than doubled over the past two years. Marqeta's "technology" expenses nearly tripled in 2021, growing to $33 million from $13 million in 2020, which could mean that much of Marqeta's hiring has been on the engineering side.
MQ Total Employees (Annual) data by YCharts.
Marqeta's business lost $164 million in 2021 from operating expenses, or money spent to run the company. However, share-based compensation cost the company $142 million this year, typical for initial public offerings (IPOs) because there are lots of bonuses paid out when companies go public. I expect share-based compensation to lessen moving forward, and this should help Marqeta work toward turning a profit as its revenue keeps growing.
The positive side of an IPO is the cash that it raises, and Marqeta now has $1.7 billion in cash and short-term investments. This is enough money to run the company for a few years without making any progress toward profitability, so investors should feel good about its financial health. It could even lead to eventual opportunities for a potential acquisition.
Marqeta's stock is unappreciated by traders
Marqeta came public last summer and has taken its lumps during this market-wide pullback among growth stocks. The stock was once expensive at a price-to-sales ratio of more than 42, but the chart below shows how much that has fallen.
MQ PS Ratio data by YCharts.
The company's market cap is $6 billion and its cash and short-term investments represent 25% of that, which suggests the business is even cheaper than the current 9.6 P/S ratio would indicate. Meanwhile, Marqeta was able to show in its Q4 2021 earnings that quarterly revenue growth is still strong at 76% year over year, and management relayed strong guidance for Q1 2022, forecasting 50% year-over-year revenue growth).
Marqeta isn't a risk-free investment; it relies on its customers' success to grow, and the business itself isn't profitable. However, if you're looking ahead, you want to see that a company has strong operating momentum and the balance sheet to handle losses while it grows. I think Marqeta checks both of those boxes, and the stock's valuation seems like an outright bargain here. If the company continues executing and taking care of business, it has the ingredients of a market-beating investment over the long term.
