Marqeta (MQ -1.17%) was a fintech darling when it did an initial public offering (IPO) in early June 2021. The stock briefly rose as much as 40% above its IPO price in mid-November 2021, but since then, the company has not given investors many reasons to cheer. Recently, the company released its second-quarter earnings report, and the stock dropped by 25%. So what bad news could cause such a significant decline?
Here are two reasons why Marqeta crashed after its recent earnings report.
1. Management appears to be abandoning the ship
Despite posting otherwise excellent second-quarter 2022 earnings results, investors were disappointed to hear that founder and Chief Executive Officer Jason Gardner would be stepping down to become executive chairman once the company's board hires a new CEO. Vidya Peters, the company's chief operating officer, is also leaving the company.
Gardner and Peters join a long list of high-level executives who have left the company since its IPO -- a scenario that many investors seem to find disturbing. The other post-IPO departures include Kevin Doerr, the company's former chief product officer; Darren Mowry, the former chief revenue officer; and Philip (Tripp) Faix, the former chief financial officer.
When investors see so much executive turnover slightly over a year after a company's IPO, it can unnerve them, especially when it takes place in a challenging market. In this case, it led to a huge stock sell-off.
2. An unprofitable company facing slower growth ahead
Although Marqeta has been in business since 2010, it is still a relatively early-stage company in the midst of scaling up its business. While it has high growth, the company is still unprofitable -- a major drawback in today's market environment.
Since rising inflation is especially hard on fast-growing, unprofitable fintech companies, many investors were quick to sell at the first hint that inflation was picking up.
Unfortunately for Marqeta, it went public just inflation began spiking. By December 2021, the consumer price index had risen to 7%, its highest level since the middle of 1982, and exacerbating Marqeta's problem was that its losses were widening. As a result, investors bailed on the stock.
An additional issue for investors is that in the second-quarter earnings report, the company revealed that several high-growth business lines were showing signs of slowing growth, including the buy now, pay later and expense-management segments. Thus, the company has had unfavorable comparisons to last year's outsize growth, which is a prime reason for its reduced revenue growth estimates.
Management announced on its second-quarter 2022 earnings call that revenue for its third quarter would be 36% to 38% year over year, a significant falloff from the Q3 2021 year-over-year revenue growth of 56%. Management also hinted that year-over-year growth could drop further in the fourth quarter.
In this market, investors are not particularly fond of growth companies losing revenue growth momentum -- an additional reason the stock sold off.
Marqeta has long-term trends in its favor
The pandemic spurred consumers to shift away from cash and physical card payments toward money transfers that take place entirely online, also called virtual transfers. Since Marqeta's advanced payment technology enables virtual transfers, it directly benefits from the shift. According to the company, this virtual payment trend remains popular with consumers as the pandemic winds down and is a significant driver of Marqeta's revenue growth, which includes digital banking; buy now, pay later; and on-demand delivery.
Marqeta currently sells at a price-to-sales (P/S) ratio of 7, low considering its P/S valuation range as a public company is between 5.77 and 29.14. If the economy were healthy, this might be an excellent valuation to buy Marqeta, as it has strong growth prospects. Unfortunately, many analysts believe there is at least a 50% chance of a global recession. In the case of a downturn, Marqeta looks overvalued compared to the S&P 500 P/S ratio of 2.65, and the stock could plunge from its current price.
Investors who choose to invest in Marqeta at current prices should be aware that the near term could be very turbulent, and things could get worse before getting better.