Marqeta Investor Insight: Valuation At 75x EBITDA Unpacked (NASDAQ:MQ)

Investment Thesis

Marqeta, Inc. (NASDAQ:MQ) is not a blemish-free investment. But even considering its pesky detractions, namely its tight reliance on Block, Inc. (SQ), I maintain that there are more positives than negatives to this investment thesis.

Essentially, assuming the best-case scenario, this stock is priced at 75x forward EBITDA. That’s clearly far from cheaply priced. However, the one thing that is highly bullish about this stock, is that once it gets beyond Q3 2024, there’s a path for this business to deliver more than +20% CAGR on the top line.

On top of that, Marqeta is debt-free, with nearly a third of its market cap being made up of cash.

Rapid Recap

Back in October, before Marqeta’s Q3 results, I stated in a tepidly bullish analysis,

The biggest question this business faces is this, can Marqeta’s non-Block ((SQ)) business grow enough so that this business actually becomes enticing enough for new investors?

I believe the answer is yes, but I remain cautious that MQ stock is already richly priced. So, although I’m hopefully and tepidly bullish, I’m also aware that this business is far from blemish-free.

Since I turned tepidly bullish on this stock it has moved in a positive direction, inching ahead of the S&P 500 (SP500), but hardly enough to get anyone particularly excited.

And that’s where I remain, tepidly bullish on this stock.

Marqeta’s Near-Term Prospects

Marqeta provides technology for businesses to issue and manage payment cards, both physical and virtual. Essentially, they offer a platform that helps businesses create and customize their own credit and prepaid cards with specific features.

This includes not only traditional payment cards but also innovative solutions like Buy Now, Pay Later (“BNPL”) programs. Marqeta’s platform streamlines the process of launching and managing these card programs, making it easier for businesses to offer their customers unique and personalized financial solutions.

In the near term, Marqeta faces several challenges that could impact its financial performance and growth trajectory. Firstly, the company is grappling with a significant revenue contraction due to the Cash App renewal signed in the third quarter of 2023. The associated accounting changes related to Cash App resulted in a substantial year-over-year decline of 43% in net revenue. This contraction, comprising a 70 percentage point decline attributable to the Cash App renewal, poses a considerable headwind for the company.

The impact on gross profit growth, particularly from the renewal pricing, further exacerbates the challenge, contracting gross profit by 9% compared to the same quarter in 2022.

Secondly, Marqeta is contending with competitive dynamics in the Buy Now, Pay Later space. Despite being an early beneficiary in the BNPL sector, Marqeta now faces increased competition as major providers have introduced new products to address evolving consumer and merchant needs. The company’s initial BNPL solution, which required a virtual card at the point of sale, has been met with industry shifts towards Pay Anywhere solutions offered by competitors.

These solutions allow consumers to pay in installments across multiple merchants, challenging Marqeta’s market position. The company acknowledges the commoditization of instant issuance, and while it has maintained an advantage in BNPL due to the breadth of its platform, adapting to the changing landscape presents a formidable short-term challenge.

With this context, I’ll now cut to the bull case on this stock.

The bull case is that as more and more volume goes through Marqeta’s payment network, Marqeta will be able to capture more market share and become a highly profitable fintech, with the goal of reaching GAAP profitability by Q4 2026.

Considering this backdrop, let’s now explore Marqeta’s financials.

Revenue Growth Rates Require Interpretation

If you are reading about Marqeta, I’ll assume that you are already familiar with the repricing of Marqeta’s key customer, Block, that took place in Q3 2023.

This is old news by now, therefore, when the graphic above shows that revenues were down 43% y/y, that’s nearly entirely being driven by the changing of the contract with Block.

Consequently, the only question that investors have to come to grips with is, what the remainder of Marqeta’s organic growth rates will look like once Marqeta has lapped its Q3 2023 results.

Moreover, the entire bullish argument supporting this crucial change was based on the expectation that Marqeta’s alteration in accounting for Block’s contract would lead to a substantial expansion in gross margins, ultimately resulting in a significant boost in gross profits.

As it transpires, even as Marqeta’s gross margins jumped by 2,500 basis points y/y, the underlying gross profits were still down 9% y/y.

So again, I don’t believe that on the surface, Marqeta’s prospects look all that alluring.

MQ Stock Valuation — 75x Forward EBITDA

Marqeta had its investor day in November. The takeaway for investors was a reiteration that the business will be adjusted EBITDA profitable starting H2 2024.

This means that on a forward run-rate, starting Q4 2024, Marqeta could see around $40 million of EBITDA and that this figure would grow from there.

To put this more concretely, investors are being asked to pay 75x forward EBITDA for Marqeta. That’s not a particularly shocking valuation, but it’s far from the bargain basement, too, I hope you’ll agree.

On the plus side, Marqeta is debt-free with more than $900 million of cash on its balance sheet.

The Bottom Line

In conclusion, Marqeta presents an investment opportunity with both merits and drawbacks.

Despite certain concerns, particularly its heavy dependence on Block, I maintain a somewhat optimistic outlook on this investment.

The stock, currently trading at 75x forward EBITDA, might seem pricey, but the bullish aspect lies in its potential for a +20% CAGR beyond Q3 2024.

With a debt-free status and approximately one-third of its market capitalization in cash, Marqeta is well positioned for future growth.

The key question remains whether Marqeta’s non-Block business can achieve sufficient growth to attract new investors, a consideration that underlines the cautious optimism surrounding this investment.