Unprofitable tech stocks have been hit the hardest by the bear market, and the stock of Marqeta (MQ -2.92%) is a prime example, down about 80% since its initial public offering (IPO) in 2021.
On the flip side, Marqeta is demonstrating strong growth and is generating cash. It's going through short-term growing pains right now, but it has a recipe for long-term success. Looking for a great deal on a long-term winner? Take a look at Marqeta.
High growth despite economic volatility
Marqeta provides customizable credit card software for business clients. It works with companies that need more than the available turnkey options, or that provide their own payments solutions and need a partner to develop them.
An example of the former is Instacart, which uses Marqeta's platform to provide its shoppers with the ability to pay for orders. And an example of the latter is Block, which partners with Marqeta for the technology behind its Cash App cards.
This is a huge and expanding opportunity, and Marqeta has been demonstrating rapid growth. These are from all of its reports since going public, showing annual revenue percentage growth and net income (in millions).
| Metric | Q3 22 | Q2 22 | Q1 22 | Q4 21 | Q3 21 | Q2 21 |
|---|---|---|---|---|---|---|
| YOY growth | 46% | 53% | 54% | 76% | 56% | 76% |
| Net income (loss) | ($53) | ($45) | ($61) | ($37) | ($46) | ($69) |
Source: Marqeta. YOY = year over year.
As you can see, it's nowhere near profitability. A lot of that is due to stock-based compensation, which many public companies deal with in the years after an IPO. Other expenses are related to growth and expansion, which is also standard for a company at this point in its journey.
One positive that investors should note is that Marqeta ended the 2022 third quarter with $1.2 billion in cash and no debt. It's also generating free cash flow. That's a serious strength, and should give shareholders some comfort as Marqeta moves toward profitability.
MQ free cash flow data by YCharts.
New developments to power growth
The company has been following the typical trajectory for an early growth company, which means highs and lows in company performance, stock price, and general operations. Founder and Chief Executive Officer Jason Gardner announced he was stepping down in August to make room for the company's next growth phase.
Investors don't love when founding CEOs move on, because founders are usually very committed and know the company inside out. When one leaves, it could signal a lack of confidence or coming turbulence.
Marqeta finally announced a replacement last week in Simon Khalaf, who has a long history as a tech executive and joined Marqeta in June as chief product officer.
Last week, it also announced its first acquisition, Power Finance, which offers embedded finance credit card services. Embedded finance refers to financial applications "embedded" in another company's transactions. Khalaf explained that the acquisition expands Marqeta's capabiliities, allowing it to further customize and simplify its products.
The deal is $275 million, all in cash, which Marqeta can easily weather. It seems a tad ambitious for a company that has $700 million in trailing-12-month revenue, but if it helps Marqeta expand, it will prove its value over time.
Assessing the risks
There are obviously risks when any company hasn't posted a profit, and the losses have yet to consistently narrow.
There's another risk in that the majority of Marqeta's revenue comes from Block, and that increased from 68% in the 2021 third quarter to 73% in the 2022 third quarter. That was in part due to Block's acquisition of Marqeta client Afterpay, a buy now, pay later company.
The Power Finance acquisition might help Marqeta expand its client base, but it also could be an effort to keep Block's business when its contract expires in 2024.
Is Marqeta worth buying right now?
Marqeta stock trades at a price-to-sales ratio of almost 5, which is on the lower side of what it's been so far, and also fairly cheap for a company posting high growth.
Investors who purchased shares early in the company's history might be sitting on a loss, but the bleeding may have stopped, with the price little changed so far in 2023. This might be an attractive entry point for those who have been sitting on the fence, before the price begins to climb.
Marqeta has strong prospects. It will probably continue to post losses as it scales up and moves in new directions. In the long term, it should find its footing and reward shareholders.
