• SLT Research

Marqeta

Updated: Aug 23

Hold, NASDAQ:MQ

 

Marqeta's mission is to be the global standard for modern card issuing, empowering the most innovative products to the world.


Marqeta created modern card issuing which is at the heart of today’s digital economy. The company provides developers advanced infrastructure and tools for building highly configurable payment cards. With its open APIs, the Marqeta platform is designed for businesses who want to easily build tailored payment solutions to create best-in-class experiences and power new modes of money movement. Marqeta is headquartered in Oakland, California.


The company was founded in 2010 by Jason Gardner. He serves as Chairman, and Chief Executive Officer of Marqeta. Marqeta is Jason’s third company. He co-founded PropertyBridge, which became the leading rent and lease-related payment and transaction integration platform for multifamily real estate. PropertyBridge was acquired by MoneyGram International (MGI) in 2007. Before PropertyBridge, he founded Vertical Think, an IT management company that worked with start-ups and larger organizations. Jason has a proven experience in both entrepreneurship and in the payment/transaction industry.


Jason is supported by Vidya Peters, Marqeta’s Chief Operations Officer, leading the company’s marketing, revenue and program management teams, responsible for how Marqeta positions itself in the industry, serves prospects and onboards and supports customers for long-term success. She joined the company in 2019 after having occupied with success a similar role at MuleSoft.


Randy Kern is Marqeta’s Chief Technology Officer, responsible for scaling the global engineering team and driving technological advancements across the company. He brings decades of engineering experience especially with past experiences at Salesforce where he was responsible for building out a unified tech infrastructure to support the company’s industry-leading enterprise cloud products but also at Microsoft, where he led development for its Azure Compute team.



Modern Card Issuing


Before delving into the notion of modern card issuing, we would like to start with a brief overview of the traditional card transaction life cycle, which involves multiple actors such as the issuing and acquiring banks and processors, and also the card issuer and networks.

Source: EY


The recent disruption of the Covid-19 pandemic has accelerated the growth of digital payment methods such as contactless and card-not-present transactions, driving card issuers to transform at speed. As a result, traditional card issuers are losing ground to digital competitors, with three pain points putting traditional models under pressure:

  1. Slow to adapt: Legacy systems that are hard to configure hinder card issuers from making nimble changes to card offerings, impacting competitiveness.

  2. High operating costs: Running legacy systems can be expensive, requiring specialized resources to develop and test changes and to operate mainframe legacy applications.

  3. High replacement costs: Switching providers and setting up a new processing platform can be very complex and disruptive. A core credit card processor at a large issuer can interface with more than 100 upstream and downstream enterprise applications.

According to Marqeta, modern card issuing is secure card issuing and processing delivered via an open API platform that enables card issuers to create customized payment card products that leverage a just-in-time (JIT) funding feature, authorizing their end users’ transactions in real-time. Integrated with major global and local card networks (Visa, Mastercard...), modern card issuing enables card issuers to build payment solutions to their specifications and launch them globally and quickly. APIs enhance competitiveness, innovation, and flexibility, enabling the intersystem connectivity required to give customers the omnichannel experiences they demand. Cloud-based hosting offers greater flexibility, efficiency, and cost savings compared with traditional processors.

Source: Marqeta


Because Marqeta is a cloud-native, open API platform and has established relationships with key players necessary through the card payment life cycle, it allows its customers to focus only on their products and to develop tailor-made payment products without having to worry about finding an issuing bank, processor, and then a credit card network. Marqeta takes care of everything, making it the one-stop access to the modern payment ecosystem and services.


Platform and Products


Through its single platform, Marqeta offers 3 main products for modern card issuing and transaction processing.


Marqeta Issuing

The starting point is Marqeta's card issuing product, enabling customers to issue physical, virtual, and tokenized cards. As of the end of 2021, more than 490M cards were issued through the platform. Services and functionalities are as follows:

  • Customization: Marqeta partnered with Sutton Bank to issue cards with direct integrations with Visa, Mastercard and PULSE (part of the Discover Global Network) networks. Customers can create directly on the platform customized card programs to fit their specific business needs without needing to build those complex relationships or integrations themselves with issuing banks and card networks. Using open APIs, customers can easily define card attributes for where and how a card can be used (e.g. ATM, point-of-sale, location, currency...). Marqeta’s customers also control the design and feel of their physical and virtual cards.

  • Testing and Security: The platform gives customers access to a simulation environment (Marqeta sandbox), enabling them to test and validate their programs easily and quickly before launch. The platform also gives the ability to securely embed sensitive card data into mobile apps.

The Marqeta platform allows customers to manage card issuance over the entire card lifecycle. Through the dashboard, customers can order, activate, set expiration, suspend, and terminate cards.


Marqeta Processing

When a merchant initiates a payment attempt, Marqeta ensures card authentication via PIN or signature verification for scenarios where the card is present. With JIT funding, a customer can programmatically authorize and fund each transaction in real time. Utilizing this feature, each card maintains a zero-amount balance until the card is used and approved.

Once a transaction is completed, a customer can turn on notifications to provide real-time, meaningful messages to end users. In Gateway JIT, the customer can inject custom metadata into each transaction to accelerate reconciliations. The full cycle is pictured below.

Source: Marqeta


Marqeta Applications

With Marqeta Applications, customers can leverage applications that cover the entire payments lifecycle, including the developer sandbox, card management, transaction monitoring, and case management. Marqeta applications allow customers to:

  • Utilize developer tools.

  • Streamline program administration.

  • Reduce and mitigate fraud.

  • Manage cases and disputes.

  • Simplify compliance and reporting.

  • Analyze data intelligence.


As per the company's S-1 filling, Marqeta is the first company to offer a platform for modern card issuing and transaction processing and the first to market with multiple issuing and processing innovations, including the first open APIs, JIT Funding, and Tokenization as a Service.


Opportunity


Secular Trend

Source: Marqeta IPO Slide Deck


Payments Industry Trends
  • In-store payment methods: In-store sales will remain the largest retail channel by both share and dollars as shopping habits normalize. From 2022 on, in-store’s share of retail sales will once again contract as customers gravitate toward ecommerce. According to Insider Intelligence forecasts, debit spending will account for nearly 40% of in-store retail and food services dollars. The demand for contactless is also giving rise to alternative and experiential methods, such as proximity payments such as Apple Pay, in-store buy now, pay later (BNPL), and click and collect.

  • Ecommerce growth: US retail ecommerce sales is likely to exceed $1T for the first time this year, although growth will be distributed unevenly across channels: desktop sales will decelerate through 2025, while mobile purchases boom, accounting for 4 in 10 retail ecommerce dollars for the first time this year. Still according the Insider Intelligence, that is the reason why checkout providers are focusing on optimizing the mobile payments experience, as well as exploring opportunities in social commerce.

  • Digital payments: The digitization of payments is not just contained to retail, though, with real time mobile P2P payments, digital remittances, and digital business payments continuing to blossom as change spreads through the ecosystem. It is expected that by 2025, over 7 in 10 smartphone owners will be mobile P2P payment users. Digital remittances (cross-border money transfers made over the internet by the migrant population) are expected to jump 45% between 2021 and 2025, to $428B, according to a report from Juniper Research. US B2B payments are set for a second consecutive year of growth in 2022, with volume forecast to reach $28.61T. To capitalize on the opportunity, payment providers will deepen their push into the B2B space, catering especially to small businesses (making up a significant share of the US B2B payments market) in search of accessible, affordable solutions.


Total Addressable Market

Even before COVID-19, alternative (to cash) ways of paying for goods and services were evidence of a steady shift to digital payments, a shift that might ultimately lead to a cashless global society. According to PwC analysis and driven by a rapid and permanent customer shift to digital payments, non-cash payments are poised to firstly grow at c.13% CAGR (2020–2025) and then at c.10% CAGR between 2025 and 2030, to reach 1.9T in transactions volume by 2025 and 3T by 2030.

APAC is expected to be the frontrunner in the race and, in 2025 and 2030, the region will represent more than half of global non-cash transactions. In Europe, mobile payments and cross-border e-commerce will drive the region beyond 500B transactions by 2030. Latin America and the Middle East and Africa (MEA) represent a favorable environment for digital payments growth due to the strong demand for e-commerce, mobile payments, and a flourishing fintech ecosystem.

Still according to PwC, alternative payment methods are expected to reach $313B in revenue by 2030, four times more than in 2020, becoming the second biggest revenue pool after banks.

Marqeta estimated a TAM of $74T based on 2021E global money movement. In 2019, card based payments were estimated around $30T, and using the increase in number of transactions above (3026/1035 = 2.9x), we could simply imply an approximative TAM of $87T by 2030. Assuming that Marqeta processes 1% and retains 48bps in net revenue (will be covered in the below section), we can derive a potential net revenue of $4.18B by 2030.


Business Model


The company employs a usage-based model, based on processing volume and derive the majority of its revenue from interchange fees generated by card transactions through the platform. Additionally, it generates revenue from other processing services, including monthly platform access, ATM fees, fraud monitoring, and tokenization services. Interchange fees represented more than 85% of the 2020 net revenue according to the S-1 filling.

Interchange Fees are transaction- and volume-based fees paid by the acquiring bank to the issuing bank that issued the payment card used to purchase goods or services from the merchant. Marqeta receives 100% of the interchange fees for processing customers’ card transactions. The company typically share a portion (portion depends on the processed volume and relationship with the client) of interchange fees with customers.

Source: Marqeta IPO Slide Deck

Marqeta has partnered with banks with less than $10B (classified under "exempt transactions" by the Federal Reserve Board on the right picture) in deposits who are exempt from regulation on how much they can charge as an interchange fees. By partnering with banks that are not subject to this regulation, the company can earn higher interchange fee rates.


The average interchange fee per exempt transaction in 2020 was 1.39% for the MasterCard network, 1.41% for the Visa network and 0.69% regarding PULSE network.


Using the Visa average interchange fee, data provided in the 10-K, and the sample transaction example exhibited above in Marqeta's IPO slide deck, we can approximately calculate the following interchange fees distribution as follows:

  • Customer: 93bps (1.41% - 0.48% of Marqeta net revenue)

  • Card Network and Issuing Bank: 29bps (with the issuing bank accounting only for c.11% of the 29bps. i.e. 3.2bps for the issuing bank and the remainder going to the card network provider)

  • Marqeta: 19bps

More generally, the below chart, provided by James Ho on Twitter and widely used by our peers, is a good illustration of the interchange fee distribution.

Source: Twitter


Competitive Moat


The first moat is technologic in our opinion. Marqeta created modern card issuing and changed the card-issuing industry in 2014 by developing proprietary software that improved payment card capabilities beyond the international standard that governs the flow of payment transaction information with innovations like JIT funding and Tokenization-as-a-Service (TaaS).

The technology they developed is highly disruptive because developers can build modern card-issuing applications on Marqeta's open API cloud-based platform and customers can now issue payment card products to their customers or employees without directly interacting with a traditional bank. Marqeta's software has made card issuing simpler and more customizable, and can bring card programs to market much faster than older payment software. It quickly became popular for modern fast-growing start-ups and fintech companies.

Marqeta's platform is trusted by fintech leaders and disruptors like Square, Klarna, Affirm, Coinbase, but also by major banks like JP Morgan and Goldman Sachs, and even by tech giants like Uber. It proves a little more that Marqeta developed a unique and game-changing product/platform and benefit now from a strong brand recognition.

Source: Marqeta's Investors Video.


The second is its outstanding retention rate (c.200%) implying high switching costs. Switching costs describe the burden incurred by customers from switching providers, which can reduce churn and act as a barrier to new entrants. Companies with high switching costs are more likely to see high customer retention (i.e. reduced churn rates over time) as the bar for customers to move is set higher. It also becomes more difficult for competitors to grab customers, as their value proposition must now outweigh the total costs of moving to a different provider. Switching costs can be placed into three distinct categories:

  1. Financial: The quantifiable monetary losses where cost-benefit analyses must be performed to determine if the switch is worth the costs.

  2. Procedural: The losses stemming from evaluating potential alternative platform offerings, set-up costs, and learning/training fees.

  3. Relational: The losses from ending long-term business relationships, as well as giving up loyalty perks and incentives for long-term customers. Marqeta developed has strong start-up culture hence, employees are closer to the start-ups they serve. The company also issued warrants to high-profile clients like Square, in order to incentivize high volumes and long-term relationship.


Financials


Net Revenue

As of the end of Q1 2022, total processing volume (TPV) increased by 53% year-over-year, rising to $37B from $24B in the first quarter of 2021. TPV represents the total dollar amount of payments processed through the platform, net of returns and chargebacks. In 2021, Marqeta processed $111.13B, up from $60.08B and $21.67B in 2020 and 2019 respectively.


As per latest quarterly earnings, net revenue increased by $58M, or 54% year-over-year, rising to $166M from $108M in Q1 2021, in line with the year-over-year increase in TPV. Net revenue is composed as follows:

  1. Total platform services (net): It mainly includes interchange fees, net of revenue share (part of the interchange fee retroceded to the customer). Accounted for $502.3M (97%) of total net revenue in 2021.

  2. Other services: It primarily consists of revenue earned for card fulfillment services and represented only 3% ($14.9M) of total net revenue in 2021.

Total net revenue of $517.2M in 2021, increased by 78% and 260% compared to 2020 and 2019 total net revenues.

During 2021, revenue increased by $226.9M ($152.6M - 67.3% was attributable to Block). The increase in net revenue was primarily driven by an 85% increase in TPV, partially offset by a decreased average interchange rate earned on transactions processed and by a 2% increase in revenue share payments attributable to increased average revenue share rates, compared to the same period in 2020.


Costs of Revenue and Gross Margin

As previously discussed in the Business Model section, the two main components of total costs of revenue are: card networks fees and issuing bank fees. The former accounted for more than 85% of total costs of revenue.

Costs of revenue of $285.5M in 2021, increased by 66% compared to 2020. The increase was primarily due to increased card network fees as the result of the 85% increase in TPV and 70% increase in the number of corresponding transactions.


Regarding Q1 2022, gross profit increased by 50% year-over-year, rising to $75M, from $50M in Q1 2021 primarily due to the TPV growth. Gross margin was 45% in the first quarter of 2022.

Gross profit in 2021 was a little bit shy of $232M, representing a 97% increase compared to 2020. The attentive reader would have already noticed the scaling potential of Marqeta. Indeed, costs of revenue increased by only 66% while TPV and net revenue increased by 85% and 78% respectively. We can easily deduct that as volumes ramp up, Marqeta has the potential to improve its gross profitability and it is confirmed with the gross profit margin of 45% in 2021, up 4% from 2020 (41%). It will remain the case as long as higher revenue share rates due to higher volume processed are offset by additional card network incentives resulting from reaching specified volume tiers.


Operating expenses and Operating Margin

Source: Marqeta 2021 10-K Form


Compensation and benefits expenses increased drastically in 2021 due to a $114.4M increase in share-based compensation (SBC) expenses, mainly because of the increase in Marqeta's employees base and the CEO long-term performance award. Compensation and benefits expenses are high relative to net revenue, representing 62% of net revenue vs. 45% in 2020. The company expects compensation expenses to increase in the future, in part due the labor market shortage that is currently prevalent in the US market and increases in rates of inflation. Even if SBC is a non-cash expense and one of the largest operating expenses, the amount of total operating expenses as a percentage of total net revenue is very high (c.75%, compared to 57% in 2020).


As a result, operating lost deepened to $-162M (31.33% of net revenue) in 2021 from $-47.1M (16.22% of net revenue).


In Q1 2022, net loss aggravated by $48M to $61M in the quarter due to increases in compensation, benefits, and technology expenses, as the company continues its investment in people and the platform.


Regarding Marqeta's long-term operating model, the company targets a year-over-year net revenue growth range of 20%-30%, a gross margin ranging between 40% and 45% and an adjusted EBITDA margin of 20%.


Balance Sheet

Marqeta's balance sheet is very solid. On the liquidity side and as per latest reported earnings (Q1 2022), current ratio was 7. As expected, the company is an ultra-asset-light business and as a consequence, current assets, and cash and short term investments, accounted for c.98% and c.92% of total assets respectively.


Regarding the company's solvability, debt is not significant. Total debt on assets and on shareholders' equity were both less than 1%.


Cash Flow Statement

Source: Marqeta 2021 10-K Form


The company was free cash flow (FCF) positive in 2021 thanks to non-cash expenses (SBC) and the positive change in working capital. The company's capital expenditure is not significant resulting in a FCF close to the operating cash flow. However, FCF margin deteriorated in 2021 to 10.2% from 16.5% in 2020.


If we look at the FCF on a quarterly basis, FCF is very volatile and alternates between being positive and negative, mainly due to changes in working capital, being importantly negative at the beginning of the year and inversely positive toward the end of the year. Based on the company's current solvability, we don't see it as a significant problem.


Consensus quarterly financial statements estimates, source: DeGiro


Valuation


The company is yet to be profitable and despite being FCF positive, given the volatility of the latter and the impact of SBC, we have decided not to use a DCF valuation model but a EV/TTM Gross Profit multiple (widely used by the consensus).


Assessing the relative valuation of Marqeta is challenging because the company is pretty unique and only one "close competitor" is publicly listed (Adyen). Galileo and Stripe are privately owned. As a consequence, we have decided to value the company relative to a basket of high-growth-commerce-enabling fintechs.



  • EV/ Gross Profit 2022E

Multiple

17.32

2022E Gross Profit*

$288.8M

Net Cash

$1,629.58M

Intrinsic Market Capitalization

$6,632.23M

Number of Shares Outstanding

541.38M

Price per Share

$12.25

*Assuming a Revenue 2022E of $722M and a gross margin of 40%.


At the redaction's time of this analysis, Marqeta's stock is trading around $10.5, representing a 17% upside potential. We admit that the valuation is very conservative, and that the closest company in terms of business model (Adyen) is trading at higher multiple. Due to the unique, disruptive, and relatively early stage characters of Marqeta, we don't believe that it would be wise to set a target price today.


Conclusion


The traditional bankcard issuer processing industry was designed to accommodate card issuance from banks, rather than fintechs. When banks issue credit and debit cards, the services they require are relatively standardized. The legacy card processing industry has developed a standardized menu of solutions designed around bank-specific needs, and have built tremendous scale resulting in a deep moat. However, a new group of technology oriented financial services card issuing customers emerged over the recent years and changed the marketplace. The players require a more flexible, API-driven card issuance solution and need to embed card products into their business models. They are not looking for a standardized processor to build a time consuming custom solution but rather a more modular, self-service approach where API-driven "plug-ins" can be utilized by developers to power unique processes and flows in weeks and not months. Marqeta is one of the first with this revolutionizing platform and benefits from a technologic moat, high TAM, and evolves in a high switching costs industry.


Marqeta has the potential to grow in line with disruptive fintechs like Square and develop its scalable business model. However it does not come without risks.


Top Risks
  • Concentration: The company generated 69% and 70% of its net revenue from its largest Customer, Block, during the years 2021 and 2020 respectively. In addition, the agreement with Block for Cash App and Square Card expires in 2024. The agreement automatically renews thereafter for successive one-year periods, unless terminated earlier by either party. Even if evolving in a high switching costs industry, the fact that the company could lose more than 70% of its net revenue (including Afterpay bought by Block) in 2024 is the main risk in our opinion.

  • Competition: Competition in the modern card issuing processing space is intensifying. Marqeta's biggest competitor Galileo (acquired by SoFi) has a particular foothold at neo-banks like Chime, Revolut and Robinhood. In addition, Stripe and Adyen are moving more into Marqeta's lane with Stripe having already a presence in the US market. This will likely limit Marqeta's pricing ability when bidding for new businesses. In Europe, Adyen is also likely to slow Marqeta's international development. However due to the very important TAM, we believe there is room for these companies to exist together. We are more concerned about pricing power and margins.

  • Operational Expenses: As already mentioned, we believe compensation and benefits (62% of net revenue) are an obstacle to Marqeta's path to profitability, especially after the company warnings to investors about the difficulty to attract people that would result in even higher compensation and benefits expenses given the current labor shortage and inflationary.

From a valuation perspective we have adopted a conservative stance, justified by above weighing risks and actual conjuncture (high inflation, higher interest rates, consumption reduction and increasing recession probability). There is also a seasonality aspect worth considering before initiation a position. The second quarter is usually less profitable (gross profit) due to reset of card networks volumes for reward calculation. In other words, Marqeta will have to retrocede more (in percentage) to card networks provider in Q2 than it does in Q4 or Q1. In the current volatile environment where investors tend to overreact, we believe that, if the opportunity to initialize a position comes, price would be more attractive post Q2 earnings call.


There is a lot to like with Marqeta and we will include the company in our watchlist but with actual company's risks and valuation we cannot initiate a position. However, a better customers mix, strong competitive position, and net losses reduction, would trigger a inclusion of the stock in our SLT Innovation portfolio.

 

For further information please visit Marqeta's IR website.

We hope you have enjoyed the analysis.

Don't hesitate to like or to give us your thoughts in a comment!


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