Most investors were aware by the end of 2020 that the pandemic had vastly accelerated the shift from cash to digital payments, making digital payment companies a very trendy investment. As a result, Marqeta (MQ 1.48%), a payments innovator, joined the public markets in June 2021, hoping to take advantage of high investor interest.
Unfortunately for Marqeta, fast-growing digital payment stocks lost their allure when the market began to sour in late 2021 over inflation concerns. And while this rapidly growing company has excellent long-term tailwinds, investors should remain cautious about buying a volatile stock like Marqeta in the current market. Here are two risks investors should consider before investing in the company.
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1. Customer concentration
Marqeta's most significant short-term risk is that only a small number of customers account for a large percentage of its net revenue -- with Block (SQ -1.97%) as its largest customer. Additionally, after Block recently purchased another of Marqeta's customers, AfterPay, the customer concentration issue only intensified -- highlighting that future payments industry consolidation could exacerbate Marqeta's customer concentration issues.
According to Marqeta's first-quarter 2022 10-Q filing, Block accounted for 66% and 73% of net revenue for the three months ended March 31, 2022, and 2021, respectively.
Marqeta's current agreement with Block for Cash App expires in March 2024, and the contract with Block for Square Card expires in December 2024. Additionally, customers may be able to cancel their agreements before the expiration of the contract's term. Consequently, if Block suddenly cancels its contract with Marqeta, the sharp decline in revenue could significantly hurt Marqeta's financial condition and almost immediately send Marqeta's stock price spiraling down -- something investors should strongly consider.
While Marqeta continually adds new customers to dilute customer concentration, reducing over-reliance on Block will likely remain a significant risk.
2. Strong competition on the way
Historically, banks issued consumer credit cards using software from legacy technology platforms, such as Global Payments (GPN -0.63%), Fiserv (FI -0.13%), and Fidelity National Information Services (FIS -0.50%). Companies such as Wex (WEX 0.01%) and FleetCor Technologies (CPAY -0.21%) used their proprietary software to issue fleet fuel cards and corporate spend cards for business accounts.
However, Marqeta upset the apple cart in the card-issuing industry by creating proprietary cloud-based software beyond the capabilities of the legacy providers' solutions while opening up that software to outside developers. As a result, businesses now have a way to issue their payment cards quickly without having to deal directly with a bank.
Marqeta's only real competition in modern credit card issuing since its founding in 2010 has been Galileo, now owned by SoFi Technologies (SOFI -0.42%). However, significant competition will soon come from European-based Adyen (ADYE.Y -0.40%) and American-based private company Stripe.
Marqeta, Adyen, and Stripe are all in the business of replacing the numerous payment intermediaries between the shopper and merchant. However, Marqeta's platform only replaces intermediaries between the shopper and payment networks like Mastercard (MA -1.19%) or Visa (V -0.48%). At the same time, Adyen and Stripe initially started on the acquirer's side by only replacing intermediaries between the merchant and the payment networks. But Stripe and Adyen have already begun invading Marqeta's territory by creating card-issuing capabilities. Stripe started issuing cards in 2018, and Adyen began in 2019. The danger for Marqeta is that Adyen and Stripe could bundle products that look more attractive than Marqeta's offering.
In addition, the older legacy players have finally woken up and are starting to provide competitive offerings. And younger, innovative fintechs with next-generation products are arising, like privately held 11:FS. As a result, Marqeta is now facing both larger, formidable competitors and younger, more agile competitors with possibly better technology -- presenting a risk to Marqeta's long-term growth.
The bottom line on this payments innovator
Even though the competition is heating up, Marqeta estimated its total addressable market at $30 trillion in 2021, against which Marqeta only had $111 billion in annual total processing volume -- meaning there is plenty of room for both Marqeta and the competition to grow.
Investors in Marqeta are betting that this former CNBC "Disruptor 50" company can continue its strong record of innovation. In addition, the company is still rapidly growing and recently generated 54% revenue growth year over year in the first quarter. Considering that the company is valued at 9.2 times trailing-12-months sales when it has traded at more than 29 times trailing-12-months sales within the last year, the stock can be considered cheap for such a rapidly growing company.
However, Marqeta is unprofitable and free-cash-flow negative , and with the economy likely going into recession, you might want to exercise caution before deciding to open a position in the company.
