The market is looking like it may be in a bottoming process, so investors should be looking for their next big winner.
While many stocks are cheap, those looking for true home run investments should look at young growth stocks with competitive advantages, great management teams, and a large-yet-untapped addressable market.
That's why fintech Marqeta (MQ 2.11%) is a candidate to 10x in 10 years, especially after its first half swoon.
What Marqeta does
Marqeta is a technology platform that allows financial companies to customize card products with greater flexibility and configurability than ever before. Before Marqeta, any company that wished to issue a card product would have to undergo a laborious manual process. Tweaking aspects of a card would be rigid and cumbersome. Yet with Marqeta's cloud-based APIs, card issuers can easily alter the characteristics behind all types of cards on the fly.
While there has been lots of innovation on the merchant processing side of payment transactions, Marqeta is the early mover on the card issuing side, and its early mover status has attracted a wide range of customers, including fellow fintechs, digital banks, on-demand delivery companies, traditional banks looking to modernize, and even cryptocurrency companies that want to issue their own payment cards. Any platform that can attract such a diverse set of customers to include the likes of JPMorgan Chase, Coinbase, and Instacart certainly seems like it's selling something customers want.
Platform software companies can be very sticky, as it's a pain to switch from one platform to another once you have products up and running. Moreover, Marqeta's usage-based revenue model incentivizes customers to grow on the platform, decreasing the interchange fees it charges as customers hit greater volumes. Meanwhile, Marqeta's growing scale should enable it to continue investing to cement its technology lead. The mutually aligned interests with its customers and first-mover advantage give Marqeta's platform an underrated moat, in this author's opinion.
A huge addressable market
On its recent conference call with analysts, Marqeta management pointed out its platform only facilitated less than 1% of the $6 trillion in U.S. annual card payment volume, and far less of the $30 trillion in global payments volume. Marqeta's current revenue run rate is at $664 million based on last quarter's figures, while analysts project that to grow to $722 million in 2022 and $948 million in 2023.
Marqeta was only founded in 2010 and just went public one year ago, in June 2021. Since going public, the company has announced a slew of new customers, as its prominence and stature only seem to have increased as a public company.
Moreover, Marqeta has really only recently begun to expand internationally, having just entered Europe in 2018, Australia and New Zealand in 2021, and just received licenses to operate in the East Asian economies of Singapore, Thailand, and the Philippines in January of this year. Currently, Marqeta operates in only 39 countries; by comparison, card processing platform Mastercard operates in more than 210 countries.
As Marqeta signs up more and more customers and expands geographically, it should make much more headway in penetrating that vast addressable market.
A reasonable valuation as well
Another factor helping Marqeta 10x from these levels is its current beaten-down valuation, after the fintech rout over the past nine months. The stock currently resides around $10, after going public last June at $27. This is in spite of the company's beating analysts' revenue estimates in every quarter as a public entity.
Like most high-growth companies, Marqeta isn't profitable, but on a price-to-sales basis, it trades at a 10.6 ratio, which is not demanding for a company that grew revenue 53.8% last quarter. In addition, Marqeta has more than $1.6 billion in cash on its balance sheet and no debt. That cash hoard brings its enterprise value-to-revenue ratio down to just 7.2, which is quite reasonable indeed.
Marqeta doesn't burn much cash, so that extra war chest is available for Marqeta to make tuck-in acquisitions or spend aggressively ahead of would-be upstart competitors, who are now facing a more difficult funding environment today.
Risks to the picture
While Marqeta has dramatic upside potential given its huge addressable market and leadership in card issuing innovation, there is one big risk to consider. That is that Block (SQ 1.02%), formerly known as Square, amounts to a huge proportion of Marqeta's revenue, accounting for 66% last quarter. While that was down from 73% in the year-ago quarter, it's still a risk. The agreement between Marqeta and Block's Cash App extends to March 2024, with the agreement to power the Square card and Square card Canada extending through December 2024.
Needless to say, if Block doesn't renew its contract, it could be a big problem for Marqeta. However, management noted on its recent conference call that its newer customers are growing much faster than its large, older customers, so hopefully by 2024, that concentration will have gone down significantly.
Marqeta has also given Block incentive to stay, by granting it an option to buy 1.1 million shares for $0.01 in 2024, if Block meets certain growth thresholds on the platform. That's not much dilution, given that Marqeta currently has over 542 million diluted shares outstanding, but it could be a nice sweetener for Block, and incentive to stick around -- especially if Marqeta continues to display the most cutting-edge technology in the space.
The upside potential is there
Aside from the customer concentration risk, Marqeta has all the tools to 10x in a decade: innovative technology leadership, a huge addressable market, a great balance sheet, and reasonable valuation. Although profitless growth stocks have been volatile lately, Marqeta seems like one of the most promising to hit the market over the past few years.
Investors will find out more tomorrow, Aug. 10, when the company reports second-quarter earnings.