As has been the case for many companies that had an initial public offering (IPO) in 2020 and 2021, the bear market of 2022 was not so kind to financial technology company Marqeta (MQ -1.90%). Shares are down over 80% since the summer 2021 IPO -- including a big drop following the company's initial outlook for 2023.  

This remains a very high-risk, and only potentially high-reward stock. If Marqeta management (which includes a new CEO focused on more-holistic and complex services for customers) can navigate through some growing pains, it could have tremendous upside. But we have yet to see efforts begin to pay off. Tread lightly. 

Markets not impressed with 2023

One thing is for certain: Marqeta's software-based card-issuance and money-movement solutions are still in high-growth mode as the world's financial system gets digitized. Even amid a less-than-certain economy, the company is doing well on revenue growth. Total payment volume (TPV) on its platform increased 50% in 2022 to $166 billion, resulting in a 45% revenue increase to $748 million.

But in the latest leg down for Marqeta stock, it was guidance for the first quarter of 2023 that has the market concerned. Management forecast revenue to grow 26% to 28% year over year in the first quarter, a decent enough pace of expansion.

But the company is facing some scaling issues on profitable expansion. Gross profit on services rendered (after the cost of service is paid) is only expected to grow 14% to 16% year over year. That implies shrinking profit margins.

It's important to note this is a constant dynamic Marqeta will have to deal with. In its 2022 annual filing, the company notes its Managed by Marqeta (MxM) customers will be entitled to an increasing percentage of interchange fees (the "swipe fee" merchants pay when they accept payment from a customer) as their TPV increases with Marqeta.

As Marqeta's TPV and revenue ramp up, it looks like its share of those interchange fees are indeed decreasing. Thus, new revenue rolling in to kick off 2023 looks like it will be far less valuable than it was a year ago.

MQ Revenue (TTM) Chart

Data by YCharts. TTM = trailing 12 months.

Mind the ample risks to Marqeta's business

Even so, Marqeta thinks it can continue to grow its profit in absolute dollar terms, especially as it begins to integrate the recently completed acquisition of software card-issuing peer Power Finance, which will help Marqeta expand into the credit segment of the card payments space.

Management reported it recently completed its $100 million stock buyback program (which partly offsets the $160 million in employee stock-based compensation in 2022), but does not intend to repurchase any more stock at this time as it focuses on driving operational efficiencies after its merger with Power.

It's also worth noting that Marqeta still had $1.18 billion in cash and short-term investments, another $441 million in long-term securities, and no debt at the end of December 2022. The subsequent purchase of Power will set it back a couple of hundred million dollars, but this company remains cash-rich.  

Nevertheless, Marqeta is still a "prove it" business. It looked tempting to me after the big stock drop following the latest quarterly update, but it has yet to convince me it can reach a scale where it can do more than break even. Block (SQ 0.15%) accounted for a whopping 74% of Marqeta's revenue at the end of 2022. As Block (as well as its buy now, pay later subsidiary Afterpay, another top Marqeta customer) grows, it could earn an increasing amount of those interchange fees, which could further limit Marqeta's margins.

I'll admit there is still ample opportunity for Marqeta to expand its services beyond Block as it brings more-advanced digital payments capabilities to market. I understand why many investors remain bullish on this stock, and I have it on my watch list as well.

As for position sizing, if you do choose to own Marqeta, I think the company warrants only being a very small part of a portfolio right now given the risks inherent in the business model. 

At this juncture, though, I have to take a pass on Marqeta. For the time being, I'm happy to get some exposure to modern card-issuing growth via my stake in Block instead.