Marqeta: Too Many Question Marks To Remain Bullish

AsiaVision

Marqeta (NASDAQ:MQ) recently reported a strong operational quarter, with revenue and TPV both growing 53% yoy and coming in ahead of expectations. In addition, the company’s gross and operating margins expanded by ~400bps yoy as they continue to show improvement in profitability as they scale.

While Q3 guidance came in around expectations, revenue growth is expected to decelerate to 36-38% yoy as the company called out a more challenging macro environment. Consumer spending trends have remained pretty healthy so far this year, but with fears around a potential recession, revenue growth may likely decelerate in 2023.

In addition, the company announced that their CEO is departing and they will begin a new CEO search. Also, their COO is expected to leave in September, leaving a big void to be filled in the company’s C-suite.

The combination of these events has caused the stock to pull back around 25% since the company reported earnings a few days ago, as investors have become incrementally cautious around this name.

MQ data by YCharts

The stock remains down over 70% from all-time highs and is down 55% so far this year as investors have largely rotated out of high-valuation companies that currently do not generate profits as fears of a potential recession have risen.

With a more challenging macro environment likely to persist in the second half of the year, revenue growth is also likely to decelerate and could cause the company to come in below the coveted Rule of 40 score. Profitability has become a higher priority for investors given the fear of a recession, and with Marqeta’s adjusted EBITDA margins still in the negative, the company may not generate a full-year profit until 2024.

Valuation is currently around 6x forward revenue, which is within their more recent historical trading range of 4-7x forward revenue. However, given the numerous macro and sentiment headwinds the company is facing, I believe the stock may remain in the penalty box for the time being.

Earnings Review and Guidance

During the quarter, the company reported revenue growth of 53% yoy to $186.7 million, which beat expectations for around $180 million, or around 47% yoy growth. In addition, they reported total processing volume growth of 53% yoy to $40.5 billion, up from $26.5 billion in the year-ago period. Given that revenue and TPV growth were the same, this seems to imply that the company’s take-rate remained stable yoy.

Marqeta

Clearly, consumers are still spending at a healthy rate as the company’s underlying trends remain strong. While it would have been nice to see an improved take-rate, TPV and revenue both came in nicely ahead of expectations.

Also during the quarter, gross margin improved ~400bps to 42%, up from 38% in the year-ago period. Marqeta will likely continue to see gross margins expand over time as the business carries high incremental margins. From an expense standpoint, the company already has the technology infrastructure built out, so as they process more transactions, they will be able to better leverage their expense base.

In addition, adjusted EBITDA margin improved from a -9% loss in the year-ago period to a -5% loss during Q2. From a dollar standpoint, adjusted EBITDA came in at -$10.2 million, which was better than estimates for -$19.1 million. While the adjusted EBITDA margin improvement was driven by gross margins, investors will continue to place emphasis on profitability going forward.

Marqeta

The company also provided guidance for Q3, which includes net revenue growth of 36-38% yoy, and while this is quite a bit of deceleration from the 53% yoy growth in Q2, this was around consensus expectations for 37% yoy growth.

In addition, gross margin is expected to be 43-44% and adjusted EBITDA margin of negative 8-9%. While the company continues to invest in revenue growth drivers, I believe investors may soon shift their focus more towards profitability metrics, something Marqeta will need to improve on.

Management did admit that the macro environment remains uncertain for the remainder of the year, and therefore their expectations for the full-year remain unchanged, despite the outperformance in the first half of the year.

As we look ahead to the second half of the year, given the current macroeconomic uncertainty as well as fintech-specific challenges with significant declines in valuation and increasing difficulties in raising capital, we feel it is prudent to be cautious about the next several months. Many fintechs are being less aggressive about their investments in expansion. Therefore, our expectations for the second half of the year remain unchanged from when we last spoke in May. Many of the tailwinds that drove our first half upside should continue. However, we also believe that many of the customers signed in the last 12-plus months as well as crypto customers will ramp their businesses more slowly than we expected a few months ago.

Because these are newer customers ramping up, the impact of less investment by our customers and their programs is more significant in Q3 and Q4 than it was in the first half.

Not surprisingly, the more tempered approach to guidance seems plausible given the uncertainties in the market. But this was not the biggest concern during the quarter. Marqeta also announced that their CEO, Jason Gardner, will be stepping down. And while he will assume the position of Chairman of the Board once the company finds their new CEO, the timing is a bit concerning given the significant pullback in the stock. In addition, the company’s Chief Operating Officer, Vidya Peters, will also be stepping down in September. The combination of two C-suite executives leaving on the same conference call usually does not read positively.

Valuation

With the stock down over 70% from all-time highs, including a 55% pullback so far this year, investors have clearly been hit hard. While much of this pullback has been caused by the broader rotation out of fast-growth, high-valuation names, Marqeta also has a few company-specific factors that have been weighing on the stock.

First, the company experienced rapid growth in 2021 as consumers quickly transitioned to e-commerce. However, there is less visibility heading into 2023 and as the company faces difficult growth comps and fears around slowing consumer discretionary spending, revenue growth is likely to decelerate.

Second, Marqeta has a significant customer concentration with Block (SQ), which accounts for 69% of net revenue, increasing from 66% in the first quarter. Eventually, Marqeta will need to renew this contract and given the significant concentration, Block can likely renew a deal with more favorable pricing in their favor, meaning Marqeta’s take-rate could be pressured.

And finally, the more recent news around the company’s C-suite turnover raises some flags for concern.

MQ EV to Revenues (Forward) data by YCharts

The stock currently trades around 6x forward revenue, which is around the company’s historical range of 4-7x forward revenue. However, I believe the stock may remain in the penalty box over the coming quarters given the three main headwinds I briefly outlined above.

Macro uncertainty, challenging growth comps in coming quarter, and CEO/COO turnover are some major concerns worth monitoring. In addition, once Marqeta renews their agreement with Block, the company’s take-rate may be under some pressure.

For now, I remain on the sidelines as I believe the stock has now turned into more of a show-me story. Operationally, I believe results will be okay, but the uncertainties cause some concern and give me less confidence over the coming quarters.

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