Payments platform company Marqeta (MQ 0.48%) is opening its pocketbook, dropping $223 million in cash to acquire a fintech start-up called Power Finance. It's the company's first-ever acquisition and comes at a pivotal point for Marqeta, which only recently identified its new CEO to replace Jason Gardner, who is stepping down.
There's a lot here for investors to digest: How do these companies fit together? What's the financial impact of the deal? How will Power Finance help Marqeta grow?
Stay tuned -- Power Finance could help expand Marqeta's core capabilities, proving fruitful for shareholders in the long run.
How Marqeta and Power Finance fit together
When you swipe your payment card (debit or credit) at a merchant, there is communication back and forth between the point-of-sale where you are and the financial institution of your payment card. This information travels back and forth on payment networks, often referred to as payment rails; Visa and Mastercard are the two most common payment networks.
Payments were simple until the past decade; traditionally, you would swipe to pay a fixed amount, and the payment would approve or decline after the merchant and bank communicated whether the funds were available. But some companies need to manage more complex payment applications. What if certain conditions are required to authorize a payment?
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Take Marqeta customer Instacart, for example; Instacart shoppers gather an order for the groceries requested through the app. Every shopper gets a credit card to pay for orders; however, there's no credit on it. When a shopper swipes the card to pay for the order, Marqeta's software communicates with the financial institution and the payment networks to authorize the payment and the amount. This prevents a shopper from using the card inappropriately or buying the wrong items.
Marqeta's software is available through an application programming interface (API), which lets companies like Instacart, Block (Cash App), Affirm, and Uber -- all Marqeta customers -- build these types of payments into their applications.
Power Finance offers enterprises the tools to create and manage custom credit card programs. Companies can create and customize the card, the benefits and rewards, launch, and follow up with fraud monitoring and support. With Power Finance, Marqeta's customers can create their credit card programs, integrating Marqeta's API to create new and complex payment applications.
What is the financial impact on the company?
Acquisitions can be a double-edged sword that can set a company back if it takes on more than it can handle financially. But Marqeta was prepared for this acquisition, even though a $223 million purchase isn't small potatoes.
Marqeta went public in mid-2021, raising a healthy cash pile. With $1.6 billion and no debt, the company can easily digest Power Finance. It's an all-cash deal, so there's no need to worry about shareholders being diluted by new shares.
Data by YCharts.
After the acquisition, there's still about $1.4 billion on the balance sheet, which is a whopping 36% of Marqeta's market cap. There isn't an obvious need for its remaining cash; Marqeta is generating positive free cash flow.
Investors will need to hear from incoming CEO Simon Khalaf to understand what management might do in the future. The fintech industry is massive, so this might not be the last deal shareholders see.
The most important takeaway for investors
Acquiring Power Finance could help Marqeta further penetrate the credit card industry. A company blog post estimated that credit card payment volume in the U.S. alone exceeds $4 trillion yearly. The company generates revenue by charging a small percentage of each transaction its software powers, so it's a big opportunity for revenue growth over the long term. Marqeta already has many customers for whom a customized credit option might be attractive, including JPMorgan Chase, Affirm, and Klarna.
Power Finance was only founded in 2021, and Marqeta's acquisition press release lacked details about any revenue the former had been generating. Most likely, Marqeta is buying the intellectual property, and the acquisition won't immediately add to Marqeta's revenue. Investors will want to look for future updates as Marqeta inserts Power Finance into its offerings over the coming quarters.
The company's year-over-year payment volume grew 54% in the third quarter of 2022, so if Marqeta can maintain its current level of growth on the back of a more comprehensive product offering, shareholders should be happy.
Data by YCharts.
The stock remains a whopping 79% off its highs, trading at a price-to-sales ratio (P/S) of 5.4. Considering the strong payment-volume growth and positive cash flow, it seems Marqeta's long-term growth potential is nowhere near priced into the stock. That potential might have gotten larger with Power Finance now under Marqeta's umbrella.
