Marqeta (MQ -4.23%) can be easily misunderstood by people unfamiliar with the payment industry. Some people assume that Marqeta's platform only supplies the same mundane service that older conventional card-issuing software companies offered to banks for decades. But Marqeta has modernized the payment-card-issuing process, making older software obsolete. Even as its success attracts new rivals, here's why Marqeta can remain a disruptive force in its industry.
Any business can now issue payment cards
Marqeta changed the card-issuing industry in 2014 by developing proprietary software that improved payment card capabilities beyond the international standard that governs the flow of payment transaction information. Additionally, Marqeta opened that same proprietary software to outside developers.
Today, developers can build modern card-issuing applications on Marqeta's cloud-based platform. And Marqeta'a clients can now issue payment card products to their customers or employees without directly interacting with a traditional bank.
Marqeta's software has made card issuing simpler and more customizable, and can bring card programs to market faster than older payment software -- features that quickly became popular for modern start-ups and fintech companies.
For example, the food delivery company DoorDash used Marqeta to swiftly create a prepaid card that delivery drivers use to pay restaurants for the food that DoorDash's customers order. Marqeta's customization features gave DoorDash the power to approve or disapprove every transaction in real-time -- thereby controlling fraud risk. Moreover, every Marqeta-powered DoorDash prepaid card has a balance of zero dollars until DoorDash approves how much and where the driver can use the prepaid card.
Traditional debit card processors simply couldn't offer DoorDash this level of sophisticated cash management. Moreover, even larger banks find that older card-issuing software is inadequate in this new age of mobile banking -- as they use cash less frequently, consumers now demand better payment solutions .
With significant competition piling into the modern card-issuing space that Marqeta created, some investors fear that Marqeta won't be able to maintain its lead.
Marqeta's most significant competition comes from the Galileo platform, which SoFi Technologies (SOFI -7.14%) recently acquired. Galileo copied Marqeta's approach toward catering to developers in 2017 and is now considered a heavyweight on par with Marqeta. Marqeta also faces significant competition from older card-issuing software companies and newer innovative digital competitors.
However, Marqeta does have several things working in its favor. The SoFi acquisition of Galileo means that many potential customers might steer clear of Galileo, because SoFi, as a growing online finance company, competes against many of Galileo's potential customers. Marqeta can also create better solutions than the older software companies, while having the advantage of more scale over the smaller upstarts -- thereby holding both larger and smaller competitors at bay.
Also, Marqeta holds a significant advantage by being the first developer-centric company in the card-issuing space. Building a developer community from scratch can be extremely difficult, and Marqeta had a head start. As a result, competitors might have difficulty prying away existing Marqeta developers and competing for new developers attracted by word of mouth to Marqeta's brand. And once companies devote the effort to learn and build on Marqeta's platform, it becomes harder for them to change to another card-issuing service.
Marqeta demonstrated its ability to hold on to customers with its exceptional dollar-based net revenue retention (DBNRR) of 175% in 2021. On average, existing companies spent 75% more that year with Marqeta than they had in 2020. Any DBNRR number above 120% is considered excellent, and a sign that a company is both retaining and rapidly expanding its sales to existing customers.
Why the market is down on Marqeta
Even though Marqeta has an enormous opportunity ahead and has rapidly grown its revenues over the past year, it is currently unprofitable -- terrible news for Marqeta in the current market environment, as investors have sold off most unprofitable growth stocks since mid-2021. Additionally, the market has especially punished companies in the payments space because investors are concerned over global supply chain issues, inflation, rising interest rates, and a possible recession -- all situations that could slow transaction growth across payment networks.
As a result, Marqeta sells at a price-to-sales of 7.26, its lowest valuation since its initial public offering in June 2021, as the market continues to push down valuations -- giving Marqeta significant upside from this point. The company is already free cash flow-positive, has an outstanding balance sheet, and is on the path to profitability as its growth investments continue to scale.
You might require nerves of steel to invest in Marqeta in the midst of a bear market. However, if you are a long-term investor seeking fintech stocks for your diversified portfolio, then you might consider adding Marqeta at today's valuations.