Many growth stocks struggled in 2022 as the Federal Reserve aggressively hiked interest rates in an effort to reduce outsized inflation. In 2023, inflation is coming back under control and many big-name tech stocks are showing clear signs of recovery. But some fintech companies haven't been as fortunate. Marqeta (MQ 0.93%) for example, has seen its stock price fall 83% from its October 2021 peak of $37.90.
One criticism of Marqeta is its overreliance on a single customer for most of its revenue. Investors concerned about whether or not it would extend the contract just got good news on this front. The news has helped the stock jump 83% from its 52-week low in April of this year, but the company still has some work to do.
If you're considering investing in Marqeta stock, here is one reason why you should buy it and one reason why you should avoid it.
What Marqeta does
Marqeta creates payment products for companies through its "modern card issuing platform." This platform allows its customers to create customized payment cards that they can configure for their needs.
One example is when a company issues an expense card to its employees. Marqeta's platform enables companies to implement customizable spending controls, which could restrict the dollar amount an employee spends. Its technology could also ensure those employees only make purchases at approved vendors, which can significantly cut down on fraud.
Marqeta seeks to make card issuing simple and scalable for issuers and takes a fraction of the time compared to legacy card issuers. This speed to market is one reason why Block (formerly Square) turned to Marqeta when it wanted to create a virtual debit card to go along with its Cash App. Something that would've taken months for a traditional card issuer only took six weeks for Marqeta.
One reason to buy: A contract extension with its largest customer
Marqeta earns fees based on the volume of transactions processed through its platform for some customers and on a fee-per-transaction or percentage-of-volume basis for others.
One big concern for investors is Marqeta's heavy reliance on Block as a revenue source. At the end of the second quarter, Marqeta generated 78% of its net revenue from Block. This grew from last year when Block accounted for 69% of Marqeta's net revenue. This reliance on Block has investors concerned about its customer concentration risk and the potential devastation if Block didn't renew its agreement with Marqeta, which was due to expire in March 2024.
Those concerns were alleviated last month when Marqeta announced that it had signed a four-year contract extension with Block to continue powering its Cash App card product through June 2027. The new agreement will have a big impact on Marqeta's earnings. Block will have a better take rate or the fees it has to pay Marqeta due to the new agreement. Not only that, but Block will take on responsibility for negotiating with Visa and Mastercard, a burden that previously fell on Marqeta.
As a result, Marqeta expects revenue to drop around 50%, with 85% of that due to a change in accounting. While this would affect Marqeta's top-line revenue results, the overall sentiment is that the new contract extension is a positive for the fintech that eliminates a huge uncertainty for at least the next four years.
One reason to avoid: It continues to rack up losses
If you are a risk-averse investor, Marqeta's growing losses are one reason you may want to avoid buying the fintech right now. In 2020, the fintech lost $48 million. In 2021, its net loss was $164 million, and it lost $190 million last year.
MQ Revenue (TTM) data by YCharts
Marqeta's revenue is growing at a nice pace, but its expenses have increased even quicker. Last year, operating expenses grew nearly 35%. The biggest drag on the company has been employee compensation, as it expands its headcount and salaries and benefits for those employees. Overall, wages and bonuses were up 45% for the fintech. It also saw share-based compensation grow 13%, contributing to its ballooning expense costs.
The fintech has its work cut out to get into the black. Since its new CEO, Simon Khalaf, took over earlier this year, the company has done a good job of signing on new customers and renewing agreements with existing ones. In the second quarter, its bookings increased 60% from the same quarter last year.
According to the CEO, these bookings take 60 to 180 days for commercial programs and up to a year for consumer programs to launch. It expects to begin feeling the impact of these bookings at the end of this year, with even more significant effects coming in 2024.
Is Marqeta stock right for you?
Marqeta is up 83% from its low but is still down 83% from its peak. The company felt the impact of the volatility in the market last year and struggled to recover to its previous highs. Today, the stock trades at 4 times sales, near its lowest valuation since going public.
MQ PS Ratio data by YCharts
While it still has work to do to achieve profitability, its contract renewal with Block is a huge step in the right direction and removes a cloud of uncertainty about its future. With its new CEO on the right track of acquiring new customers, Marqeta is an intriguing stock to buy a little of today and add to over time as long as it continues growing its customer base.
