Marqeta’s mission is to be the global standard for modern card issuing. They enable other companies to develop, launch and operate card products, by providing the underlying technology that powers many of the new innovations in the payment space, including digital payments, buy-now-pay-later (BNPL), digital wallets, and just-in-time (JIT) funding (automatically funding an account in real-time during the transaction process). Their platform gives their customers full control to build a card that’s right for them and their end-users, allowing them to offer card products in a fraction of the time compared to legacy solutions.
- Marqeta was the first company to create an open API for issuing physical prepaid, debit and credit cards as well as digital cards, but competition is on the horizon from larger players such as Stripe and Adyen.
- Global money movement is estimated to total $74 trillion in 2021 consisting of 4 trillion individual payment transactions. In 2020, Marqeta processed $60B, <1% of the estimated card transaction volume in the US, and <0.2% of the global card transaction volume – they have an enormous total addressable market that they have barely penetrated.
- Marqeta have many well-known customers including Square, DoorDash, Instacart, Klarna, Affirm, Afterpay, Coinbase and Google.
- Marqeta has a usage-based pricing model where they take a cut of 20 basis points from each transaction, which means as their customers grow, Marqeta grows with them. Marqeta has achieved a dollar-based net retention rate of >200% for the past 2 years running.
- Square currently account for >70% of revenues, creating significant customer concentration risk. This relationship will be up for renewal in 2024.
- The company are on track to achieving a total processing volume of over $100B this year, representing a CAGR of >250% over six years.
- Higher net losses of $69M in 2021 were driven by share-based compensation resulting from the IPO and are non-recurring.
- The company has $1.5B cash and very low debt, and will be able to sustain the business for many years while revenues grow.
If you enjoyed this episode, please subscribe to the Telescope Investing podcast at Spotify, or on your podcast platform of choice
Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Monday the 8th of November.
Luke: Welcome to the Telescope Investing podcast.
News
Albert: Hey, Luke, I know you’re a big Elon Musk fan, but he did something over the weekend that really annoyed me.
Luke: Oh man, I knew you were going to open today’s episodes with this discussion. I’ve been dreading the conversation.
Albert: I guess, you know, he had a poll on Twitter on whether or not he should sell 10% of his Tesla shares to pay for a proposed billionaire’s tax.
Luke: There’s something fishy going on here, I suspect there are many other reasons why he wants to exit some of his Tesla stake and he’s playing a bit of a game with this poll, but yeah, I saw the poll. I voted, no, but it looks like the yeses took it.
Albert: Yeah. I voted no as well but I believe 58% said yes, 42% said no. So if he follows through, he’ll be selling 10% of his stock worth $26 billion.
Luke: Yeah, let’s hope sells our stock in a conservative, responsible manner rather than just dumping it all today, that could be pretty ugly for us Tesla bag holders,
Albert: Can you count on Elon Musk to be conservative and responsible?
Luke: Perhaps not, I saw he was called out by I think a politician, and he responded with a bunch of dick jokes and changing his own Twitter handle name to Lorde Edge. Maybe he’s having a post-Grimes meltdown, and it’s all just got a bit ugly.
Albert: And there’s some other red flags as well. I think it brother Kimbal sold about a hundred million dollars worth of Tesla shares the day before the Twitter poll. It’s probably a coincidence, but the optics aren’t great and anyway, $100 million is a drop in the bucket compared to the $26 billion that Musk has said he would sell.
Luke: Yeah, look, the guy’s a bit of a nutcase. He’s a genius, but he’s only human, his eccentricity does worry me and you know what, actually, we were chatting about this last week. My own Tesla stake has grown beyond the 6% that I was planning to keep it to. I trimmed it back to 6% last time and it had grown to about 7%, so I had been planning to cut it back and possibly it won’t be required, come opening of the market today.
Albert: Yeah, it’s a bit of a shame really. I think I trimmed my Tesla position a few months ago to about 9%. But since then it’s grown to about 12%, so if the share price does tank today, there’ll be a big hit to my portfolio, and to be honest, as a Tesla shareholder, I do find his antics quite annoying and a bit distracting from the real business of developing EVs and autonomous vehicles.
Luke: I agree. Actually, I didn’t realize your Tesla exposure was so big. That’s interesting, that’s going to hurt you in the game we’re all playing!
Albert: Yes, indeed. So that’s why I voted no, but unfortunately, my vote was not the popular choice.
Luke: Well, hopefully, the 42% of us that voted no, won’t prove to be the answer to life, the universe and everything. Let’s hope, the Tesla journey rolls on.
Marqeta background
Albert: So our main topic today is a deep dive into a company called Marqeta, and Marqeta is a player in the fast-growing fintech space.
Luke: I guess we’ve got a couple of investments already in fintechs and particularly e-payment companies. Like the main one we both have is Jack Dorsey’s company Square. But you pointed out a few weeks ago, there’s probably an opportunity for us to diversify a little bit beyond Square and look for some other fintech options, particularly as we’re thinking about the model portfolio for 2022. Probably time to broaden our horizons and perhaps find a couple of smaller companies that have good growth potential.
Albert: We do have some other e-payment platforms in our model portfolio. There’s MercadoPago, with MercardoLibre and also Sea Money, with Sea Limited, and I also own PayPal and Tencent.
Luke: Yeah, I’ve got MercadoLibre, Sea, and Tencent. Agree but not really a pure-play payment provider like Square. So definitely interested in Marqeta. You suggested it a few days ago, I’ve actually been quite taken with the company in the few days that we’ve done the research.
Do you own Mastercard as well? I seem to remember that being part of your portfolio.
Albert: I had the plan of buying Mastercard, but I never got around to it. Instead, I just increased my holdings in Square and PayPal.
Luke: Yeah. Fair enough. Fair enough.
Albert: But Mastercard have done really well and Visa.
Luke: They’re a beast in the end-to-end payment life cycle, as we’ll see, as we do the deep dive today.
Albert: Yeah, but there’s been a lot of new companies in the payment space, apps like Venmo and the CashApp have seen increasing adoption in the US and here in Hong Kong, nearly everyone I know has the HSBC PayMe app or Alipay and to be honest, it’s really annoying when someone says to you, I don’t have that app, and even worse they need to pay you back in cash.
Luke: When’s the last time you handled physical money?
Albert: Unfortunately, my local gym in my apartment only accepts cash. I need to pay $20 each time I go to the gym but other than that very rarely.
Luke: Is that like a real payment or is it some kickback to a janitor or something?
Albert: I believe it’s a real payment, Luke.
Luke: So a company we did think about deep diving today was Stripe, and we decided not to because they’re still a private investment. And also they’ve got a pretty eye-watering private valuation, $95 billion at the last counting. So that’s pretty heavyweight, whereas Marqeta definitely sit at a different part of the market, plus they’re public, which means we can buy it in our regular stock portfolio.
Albert: Yeah, Stripe is an upcoming IPO that a lot of people are looking forward to. And I believe it’s the most valuable private company in Silicon Valley,
Luke: Actually harping back to Elon, I think SpaceX do take that honour in their latest, private valuation round they achieved a paper valuation of $100.3 billion. So just pips the round from Stripe.
Albert: But are they in Silicon Valley? Didn’t they move to Texas?
Luke: Yeah, maybe. And now their boss is having a meltdown. God only knows what happens to their valuation.
Albert: Another company that we considered is Adyen, which is listed in the Netherlands and does something similar to Stripe. But again, that had a massive $97 billion valuation, and the company that we’re looking at today Marqeta, it’s much smaller at 15 billion.
Luke: So let’s just talk about what Marqeta do before we start looking through the Telescope Investing lenses, and always a good place to start is the company’s mission. They say, ” Our mission is to be the global standard for modern card issuing, empowering builders to bring the most innovative products to the world”.
Albert: Yeah, I like this mission statement, it’s specific and to the point, no waffle.
Luke: I agree. It makes sense. But let’s break down what they’re actually talking about. What do they mean by modern card issuing?
Albert: Well, I guess one way to see it is that enables other companies to develop, launch and operate any card product, all the backend work is handled by Marqeta while the companies like Square concentrate on the customer experience and the marketing for those products.
Luke: Yeah, and card issuing is complex, right? You need to provide underwriting, compliance, risk management. You need to be able to activate new cards really quickly and even issue virtual cards into a customer’s digital wallet.
Albert: And what Marqeta has done is abstract that complexity away into an API that companies can use to build their own card products.
Luke: They’ve built it with modern programming languages and it’s built for the cloud, so it scales easily and as you say, companies can plug into it in a much more seamless manner, hiding all of the complexity that would otherwise come with dealing with a card issuing platform.
Albert: It actually provides the underlying technology that is powering many of the new innovations in the payment space. Things like digital payments, Buy Now Pay Later, digital wallets, and just-in-time funding, which is automatically funding an account in real-time during a transaction.
Luke: And I think a really good example of this that for me brought what Marqeta does to life, was an example of how they partner with DoorDash, and how that just in time funding model operates to reduce fraud. So I’ve not used DoorDash, actually, I’m travelling to the US later this week, so maybe I’ll get a chance to have a go with when I’m there, but evidently, a Dasher who’s a DoorDash employee who kind of scurries around and buys something on your behalf and then delivers it to you, they are issued with a Marqeta powered DoorDash Red Card. And when they go to pick up the goods that they’re buying, their card payment will only be authorized if they’re spending exactly the right amount of money at the right physical location. So it stops maybe a dodgy Dasher from buying the wrong things or maybe buying it from somewhere else. DoorDash, the end customer, they know that their Dashers are following their business model, and it massively reduces fraud opportunities. And that wasn’t possible before Marqeta came along and enabled this kind of business logic as part of the just in time processing and funding.
Albert: This is just one example of Marqeta being used to offer a card product. Their platform gives a customer full control to build a card that’s right for them and is also right for their end-users, and it allows them to offer any card product in any form factor, physical, virtual, or tokenized and launch it easily in a fraction of the time compared to legacy solutions. For example, Klarna, the buy-now-pay-later provider partnering with Marqeta was able to launch its Ghost card within three months of starting the project, that’s really quick.
Luke: And Marqeta doing crazy volumes. Actually, we struggled to find really up to date numbers. So I’m going to apologize, listeners. We’ve got some numbers that are as much as six months old in our research we were able to do, but as of March this year, they’d issued 320 million cards. That feels like a big number.
Albert: And the way Marqeta makes money is by taking a cut of each transaction. Their take rate is 0.2% of each transaction, and that means that as their customers grow, Marqeta grows with them.
Luke: Yeah. So if there’s a hundred dollar purchase, let’s say it’s a door Dasher buying some groceries for a hundred bucks for a customer. Out of that hundred dollars. Marqeta are taking 20 cents, which doesn’t sound like a lot, but if you think about the potential trillions of dollars of payments that are made using cards every year, that really adds up. It’s potentially a huge total addressable market.
Albert: Yeah, I think this will come out when we discuss the total addressable market Luke, but Marqeta was founded in 2010 and actually IPO’d in June this year, just a few months ago. Its IPO price was $27, and its shares started trading at $32.50, giving it a market cap of around $17 billion. But as of the end of last week, its share price has dropped down back to 27, so it was hopping around its IPO price, and its market cap is closer to 15 billion dollars.
Luke: I guess their valuation is suppressed a little bit because they’re not yet profitable, which is very common for a growing new company. So they don’t really have a price to earnings ratio, but their price to sales ratio is 33, which is actually pretty high for this industry. As a comparison, Adyen has a price to sales ratio of 17.
Tailwinds
Albert: And looking at the tailwinds for this business, it’s basically the tailwinds for e-payments, because we believe the shift to digital payments is a megatrend that was accelerated by the pandemic, but it was growing quickly anyway. And I believe it’s one of the first megatrends that we covered back in episode two.
Luke: Yeah, and I guess this is in some ways the megatrend that’s powering everything else. Suddenly you can make payments electronically and that enables e-commerce, it enables so many other things. So really fundamental, like many of our other megatrends, not cyclical, truly secular, something that’s here to stay, adds convenience and efficiency to the payment process. Why would anyone go back to old ways of working post-pandemic?
Albert: Consumers’ trust in new payment technologies is growing, people are just getting more used to these new ways of paying for things such as digital wallets. I remember when inputting your credit card onto a website was a big deal. Now you just present your phone at a checkout point and it’s done.
Luke: Yeah, payments are not only becoming more digital, they’re also becoming integrated much more tightly into consumer and business applications. Think about the last time you used an online food delivery or a messaging app or a digital marketplace, payment’s now deeply embedded as part of that experience.
Albert: Yeah, software and payments are really converging and I guess, the goal is to create a seamless, frictionless payment experience.
Luke: Something I thought was quite interesting that I think Marqeta said in their own investor relations materials, they highlighted that their key customers, who we’ll come onto in a minute, are platforms typically used by younger generations. So things like Square, digital wallets, buy-now-pay-later. And as those customers themselves become wealthier, frankly, that’s going to drive increased payment processing volumes.
Albert: I don’t consider myself as part of the younger generation, Luke, but I almost never use cash myself.
Luke: Actually, I had a funny experience the other day. So I’ve actually got quite a lot of cash in my wallet right now. I played poker last weekend. And I think as we said on a previous episode, the poker economy is firmly cash-driven currently. I was up in Manchester for the weekend with some mates and we’re just on a bit of a bar crawl for two days. And I suddenly realized it’s quite inconvenient to go to a bar with cash. Like you used to get asked cash or card, but now they’ve literally already typed in the amount of money and they’ve prefilled it and they’re presenting with a card machine and it feels like you’re inconveniencing them if you pull out £50 note. So I had all that cash in my wallet. I barely touched it. I’ve charged everything through my card.
Albert: Don’t worry Luke, I’m sure it’ll be a time when you can play poker with your card.
Luke: Yeah, it would definitely reduce fraud and theft risk. That is a risk as a poker player.
Albert: Maybe someone will partner with Marqeta and build a specific poker card.
Luke: That’d be great. That’d be really good.
Albert: I think that’s a niche product Luke, poker, but if we look at the total addressable market, you can imagine the payments market is absolutely huge. Global money movement totalled $74 trillion in 2021, consisting of 4 trillion individual payment transactions.
Luke: Yeah. Of these in 2019, 10% of those transactions were carried out on global card networks, which was $30 trillion of value, around $7 trillion of which was in the US, Marqeta’s home market.
Albert: And in 2020, Marqeta processed around $60 billion, which is less than 1% of this estimated card transaction volume in the US and less than 0.2% of the global card transaction volume. And Marqeta is on pace to do over $100 billion in total processing volume in 2021.
Luke: Yeah. I think the key takeaway here though is the total addressable market is massive and Marqeta have got a tiny proportion of that right now. So huge room to grow, particularly as they start scaling internationally.
Albert: Yeah, the market’s huge but there are also a huge number of competitors each trying to get their slice of this massive pie.
Leadership
Luke: Let’s turn our heads towards the leadership lens and start looking through that. So Jason Gardner, founder and CEO, a bit of a serial entrepreneur, but I think probably fair to say only really made a major success with Marqeta. Maybe just picking one thing out of his history, in 2004 he co-founded a company called Property Bridge, which allowed you to pay rent on a property electronically, and he ended up selling that to MoneyGram International, but I guess he learned quite a lot about payments and so post Property Bridge, and that led him to found Marqeta.
Albert: He told an interesting story in his investor presentation, that he started Marqeta when a friend asked him over sushi if you could have a card that could hold multiple coupons and apparently, legacy systems were not capable of doing this.
Luke: He’s grown the company over the last couple of years to just over 600 employees. And again, we’ve got to address this focus on Glassdoor post-Renee’s comments, but the Glassdoor rating for the company is four and a half out of five and Jason himself has a 97% CEO approval rating.
Albert: Well, I did check a different site called Comparably.
Luke: Ah, very good.
Albert: And on that site, Marqeta scored 4.2 out of five overall rating and only 77% approved of the CEO.
Luke: That’s interesting, isn’t it? And Renee was definitely throwing shade at potential fraudulent ratings on Glassdoor. We should definitely start using Comparably as well.
Albert: Definitely, and that difference in the CEO rating is quite interesting, but the company itself has won a number of awards. They were part of the CNBC Disruptor 50 in 2020, the Forbes Fintech 50 in 2020, also the Fast Company 50 Most Innovative Companies of 2021.
Luke: Yeah. So it sounds like Jason’s done a good job of putting his company on the roadmap and growing his company’s capabilities and market. And for good reason, because he’s got plenty of skin in the game himself. He’s one of the largest single shareholders with 9.12% of the company owned personally.
Albert: Yeah, and that holding is currently worth around $1.3 billion, so I think we can safely say that he has skin in the game.
Customers
Luke: Well, we’ve given some background on Marqeta, but I think a key insight is going to come from looking at who their customers are. Let’s focus on that lens next. Marqeta has a ton of well-known customer names, companies like Square, DoorDash, Instacart, Klarna, Affirm, Afterpay.
And actually, before we talk about some of the others, let’s just talk about Google because it’s the most recent one and I’m an Android user. So on Android, the payment platform is called Google Pay and basically, you can load virtual versions of your regular bank cards into your Google Pay wallet. And so what Marqeta are doing is not getting involved in like regular bank cards on Google Pay, Google, still have that relationship with issuing banks, but they are allowing Google to issue their own card, which I think is called something like a Google Pay Balance card. And if you’ve got a credit balance in your Google Pay account, well you’ve now got a Marqeta-issued virtual credit card that you can use to pay using that balance.
Albert: That sounds like a debit card Luke, not credit card.
Luke: Yeah, I guess that’s right. I don’t think Google offer credit card facilities. I will say I’m actually having a bit of a woeful experience with Google Pay right now, personally. I had my phone upgraded to the latest security patch and since then I cannot get any of my virtual cards to work and actually feels quite archaic, like at the pub crawl, I can’t even use my phone to pay for stuff, let alone cash. I’m having to dig out actual physical credit cards in my wallet. Yeah, already, it feels like an archaic behaviour.
Albert: I haven’t had any problems with my Apple Pay Luke. Just saying.
Luke: There’s something wrong with my phone. And actually, the sense of physical cards being archaic already, I wonder at what point pulling out your phone will seem archaic. Like I know some payment platforms are moving towards biometric authentication, maybe by literally walking up to the checkout or even just leaving the store, like one of those Amazon Go stores, you get charged automatically. You didn’t actually have to show anything to anybody.
Albert: But even if that happens to Luke, I believe that Marqeta could support that using virtual cards because the underlying infrastructure still depends on cards. It’d be a long while before cards are no longer needed anywhere in the pipeline.
Luke: And Marqeta’s capability of having this programmatic logic as part of the actual transaction, is going to make them even more important as we move to modern forms of authentication, like biometrics.
Albert: Another modern form of payment is cryptocurrencies, and Marqeta has introduced features that have allowed customers to launch new products to let their customers earn or spend cryptocurrency at the point of sale. Customers like Coinbase, which allows you to use your cryptocurrency balances to pay for things in US dollars.
Luke: Marqeta also powers a lot of the move into the Buy Now Pay Later vertical and it supports the majority, of the leading innovators, companies like Klarna, Affirm, Afterpay, and one I hadn’t heard of, Sezzle.
Albert: Yeah, they reported in their last quarterly earnings that revenue from the Buy Now Pay Later segment was up 350% year over year. Another interesting thing, Alipay, the payment giant in China, uses Marqeta to allow its customers to use Alipay in the US, and Alipay has over 1 billion users worldwide.
Luke: Yeah, that’s quite exciting. That’s going to give them a foothold into Asia if Alipay start using them internationally as well.
Albert: But I guess for this to work out, people in China need to be travelling to the US and at the moment, that’s not really happening.
Luke: Let’s turn our minds to Square, this actually does give me some pause for concern. So when we talk about customers, a key risk that can come with smaller companies is the risk of customer concentration, and Marqeta seem to have this in spades. As of March 2021, 70% of their revenues came from Square and I saw a hint that may have increased to 73% more recently.
Albert: And that relationship could increase even further because I believe Square has acquired Afterpay, and Afterpay are already a Marqeta customer.
Luke: And the reason this really worries me is I’m not convinced that what Marqeta are doing is so complex for a company like Square with their deep pockets to step in and say look, we’re just going to build this card issuing capability and these APIs and this business logic ourselves.
Albert: Yeah, I’ve heard that argument, Luke, that Marqeta are just a middleman, but you could also say a company like Shopify is a middleman between the merchant and its customers, but as long as it’s providing value and making things easier for the end customer, why wouldn’t you stick with them?
Luke: I think my rebuttal to that argument is what Shopify do is not just a virtual storefront and payments, they actually do the really grubby logistics and moving of stuff. And they have now, ships and planes and warehouses and trucks. That’s really complex and I can understand why no one else would want to get near that mess. Only someone like Amazon, who invented the model. Is it so difficult though, for Square to replace the bits and bytes that’s made up of the Marqeta software solution?
Albert: I don’t know Luke, I’m not an expert in this area, but I suspect that the integration with the underlying card networks and issuing banks is quite complicated and fraught with compliance issues, and what Marqeta has done is abstract that complexity away and allows these customers like Square and DoorDash to focus on their customer experience, focus on their products, and the marketing of those products.
Luke: Yeah, just saying that I think this is a serious risk if you’re a Marqeta stockholder. And if we think about the relative revenues of these companies, out of every transaction Square retain around 80 cents out of every hundred dollars spent so 80 basis points and Marqeta take 20 basis points. So that’s not insubstantial, like Square might want to add that 0.2% to their revenue. It’s not out of the question that that’s something they consider as their contract with Marqeta comes up for renewal in 2024.
Albert: I agree with you Luke, 70% of revenues from one client is a massive concentration risk and if they lose Square as a customer, either from Square creating its own platform or moving to another provider say for example Stripe, that would really hurt Marqeta’s business, effectively quartering it.
Luke: Yeah. Should we turn our minds to another key relationship for Marqeta and this is at the other end with the issuing bank? So they partner very closely with Sutton Bank based in Ohio, and Sutton Bank settle 95% of volumes of transactions run by Marqeta and I suppose that is another form of concentration risk.
Albert: But this partnership with Sutton Bank expires in 2027. There’s quite a lot of time before that becomes an issue, but if Marqeta is able to expand these partnerships to other issuing banks, it becomes less of an issue.
Network Effects
Luke: So a couple of key concentration risks there, but still a very strong position. Let’s have a think about network effects. I guess this isn’t so much network effect as more just being quite a sticky service.
Albert: Yeah. As you mentioned before, Luke, card issuance is very complex and it’s highly regulated and resource-intensive. And what Marqeta has done is simplify this and one area that they’ve done that is in compliance reporting. A lot of these card issuers need to comply with the anti-money laundering act, the bank secrecy act and also Know Your Customer requirements. And they also certify with things like the payment card industry, data security standard, or PCI DSS, and also, 3D Secure, which is the secure online payment service offered by Visa and Mastercard. You will see it as Verified by Visa, and Mastercard SecureCode.
Luke: Yeah, look, as someone coming out of the banking industry this week. Woo. This is fraught with changing regulation on an annual basis. There’s always something new, particularly around anti-money laundering. So if Marqeta are on their game and they can keep that stuff simple, that’s gonna abstract that complexity away from merchants.
Albert: And one reason why this is a sticky service is because Marqeta is tightly integrated with the products and solutions that their customers are building. It’s an API business, I guess it’s like Twilio, but instead of communications, it’s digital payments. And once that API is embedded in your systems, it’s really difficult and expensive to take out or replace.
Optionality
Luke: So let’s think about optionality. I’m not convinced there’s huge optionality in this space. It does seem to be a somewhat narrow business and their mission statement does indicate that they’re going to be focused on card payments, at least for the time being.
Albert: I don’t think this in itself is a bad idea, given the relatively small size and their need to grow market share. Innovations in the payment space have been appearing at quite a rapid clip over the past few years and as you said, they could continue. And one thing they’ve done is have agreements with the major card networks and they have agreements with Visa, MasterCard, and also the Pulse network, which is part of the Discover Global network. This already gives them a wide reach and they could, and probably are working on agreements with other card networks and one that would be particularly useful is UnionPay, which would get them access to the China market.
Luke: Yeah, I agree. So plenty of room to scale. And particularly as we reflect back on that enormous TAM and their tiny penetration today, but I guess they’re not scoring highly through the optionality lens. It’s not like they’re building out broader and broader capabilities. But that makes sense, as a smaller company, they’re focusing on their core competency.
Competitors
Albert: Who are their competitors Luke? Well, I guess, firstly there are the legacy infrastructure giants like Global Payments and Fiserv, which still process the majority of card payments, but the reason why companies like Marqeta were founded was to address the deficiencies in these legacy platforms. Of course, these companies could upgrade their systems, but that’s going to be a major headache. It might just be simpler to acquire a company like Marqeta.
Luke: Yeah, they were the first to market with this, what they call modern card issuing capability. So they’ve definitely got the best technology at the moment, but there’s no reason why companies like Stripe and Adyen, in particular, could catch up given their deep pockets.
Albert: Yeah, they’re the two big competitors, and they’re both adding card issuance to their list of services. And as mentioned earlier, Stripe has a private valuation of $95 billion and Adyen is worth $97 billion.
Luke: And I think Stripe famously have an enormously innovative culture and some very, very smart people, probably some of the best engineers available in this space at the moment. So this is a space where Marqeta could get out-innovated and outmanoeuvred over time.
Albert: And as you said, Luke, another risk is that some of their larger customers like Square could build their own systems and work with the issue issuing banks and card networks directly.
Luke: And I suppose, although this doesn’t seem like a material risk to me, the card networks themselves, Visa and Mastercard could build their own improved card issuing services, but they decided to back Marqeta instead. So potentially some risks around strong competition perhaps in the future, but today Marqeta seem to have the superior technology.
Financials
Albert: They were the first mover, but that advantage will not last forever. Moving on to financials, Marqeta had the first and latest quarterly earnings on the 11th of August this year covering the second quarter of 2021. And their net revenue for the quarter increased 76% from the same period last year to reach $122 million.
Luke: Their gross profit increased by 70% year over year to $47 million. But actually, their gross margin has decreased from 40 to 38% due to increased card network fees. I did dig into that earnings call discussion and the company said ” we remain committed to our long-term gross margin target of between 40 and 45%. We had a higher gross margin in Q1 due to an annual recurring incentive payment from the networks. This lowered our cost of revenue and increased our gross margin by a few points. In Q2, we had higher network fee growth and network fees can vary significantly by transaction type, whether the cards present or not, it’s not so much in our control.”
I think what Marqeta have said is that they’re not going to provide a forecast of how margins are going to change in the future, but they expect it to be between 40 and 45% going forward.
Albert: So their revenue and gross profit are growing very nicely, but unfortunately, so is their loss. Their net loss increased by 865% to $68.6 million last quarter and they’re saying that this loss was increased due to employee-related costs, we have a quote from the quarterly earnings call and they said, ” Overall, our GAAP net loss was $69 million driven by our continued reinvestment in people and technology and included $56 million in share-based compensation of which $23 million was recorded for restricted stock units upon the consummation of our IPO. In addition, we recorded stock-based compensation of $5.8 million for secondary stock sales which should be considered non-recurring.”
Luke: So that’s a good clarification, actually, because I looked at those numbers and thought, oh crikey, they’re suddenly paying out so much money to employees as they grow the company and maybe it’s costing them a fortune to bring in engineering talent. But if that is all related primarily to the completion of the IPO, I guess it could be considered a one-off expense.
Albert: Hopefully it is, Luke, and one big driver of Marqeta’s revenue growth is its usage-based pricing model where as its customers grow, it contributes to Marqeta’s revenue as well. And Marqeta’s dollar-based net revenue retention rate or DBNRR has been over 200% for the past two years showing the strength of this usage-based pricing model.
Luke: Yeah, look, this is basically an insane DBNRR. We normally see numbers around 100 to 130%, and we’re pretty happy with those. 200%. That means on average, most customers are doubling their spend every year with Marqeta. And if they’ve done that for the past two years, well, that’s doubled and doubled again, so that really shows the power and the benefit that Marqeta are bringing to their 160 customers that they want to increase their volumes.
Albert: And to illustrate this, their total processing volume or TPV has grown from $47 million in 2015 to $60 billion in 2020, representing a CAGR of 318%. That’s pretty high but a lot of that growth was brought forward last year due to the pandemic. So we should expect slower growth going forward and they are on track to achieving a TPV of over $100 billion this year, and if they hit $100 billion exactly, that will still be a CAGR of 259% over six years.
Luke: Hey, look with a price to sales ratio of 33 and a CAGR of over 250%, well, it’s not going to take many years for that price to sales to come in fast.
And while we’re talking finances, let’s take a look at that their cash because this is pretty healthy. They raised nearly $1.5 billion through the IPO. And so that $60 million cash burn, isn’t too much of a concern at the moment and they really don’t have any debt, they’re pretty cash-rich.
Albert: Well, we won’t have to wait long to see how they’re doing because the next earnings call is in a few days time on the 10th of November, and they’re guiding for a net revenue of $114-119 million for the quarter, which would be a drop from the 122 million they achieved in Q2, but it’s still a 35 to 41% increase over the same period last year. But this is a lower growth rate to what they achieved historically and it may explain the lack of share price growth.
Luke: It’s interesting, I hadn’t realized that their next earnings call was so soon as you say, I guess in two days at the time of recording. I guess that’s similar to Digital Turbine. We’ve accidentally ended up reviewing companies just days before their earnings. Did you end up buying Digital Turbine last week after the episode?
Albert: Actually, I didn’t, Luke. To be honest, I’m still not convinced about its business model and I need to do more research. And I looked at the earnings and it did beat revenue estimates and guided for more revenue growth in the next quarter, but its share price did drop 14% after earnings and I believe it was due to profitability concerns.
Conclusions
Luke: That’s interesting. Maybe I’m rethinking my position about Digital Turbine’s business not being for me. It might be something I’m open-minded to actually, I’m going to take a look at it and if, there’s suddenly a better valuation after earnings, great. But what are your thoughts about Marqeta as we start to wrap up here, earnings in two days’ time, are you tempted?
Albert: I am, Luke, because I’ve been wanting to diversify my fintech basket beyond Square and PayPal. And I think PayPal has been stumbling recently. I don’t know if you remember a few weeks ago, there was a rumour that PayPal was interested in buying Pinterest and the market really didn’t like that and its share price dropped around 20%. But the interesting thing is even when PayPal said they weren’t buying Pinterest, its share price didn’t recover. I think investors are concerned that PayPal are now struggling to grow and are looking for acquisitions to boost its growth.
Luke: Wow. That’s interesting. I didn’t know the background to that, I just saw the Pinterest news. So cool. Okay. So Marqeta’s in your firing line.
Albert: Yeah, I think Marqeta looks promising. I really liked what they’ve done to innovate and modernize the payment space. And following on from what you said, I’m not overly concerned about their customers becoming competition, but they do have two monsters chasing them in Stripe and Adyen. But also remember that the total addressable market is huge and growing, so there’s likely room for many winners here.
And the reason why I like Marqeta because it’s a kind of picks-and-shovels play on fintech because they support other consumer-facing fintech players and its usage-based business model means that at its customers grow, Marqeta will grow with them. But I agree they really need to diversify their customer base because they are just too reliant on Square at the moment. If they lose Square as a customer, their business is devastated.
Luke: And maybe that’s not a material risk for the next two years. And I don’t like buying a stock for the short term, buying something for two years is a short-term play, but maybe it’s something we could review closer to 2024 when that Square relationship comes up for renewal.
I really like your comment about this being a picks-and-shovels play on fintech, that makes absolute sense. They’re quite hidden behind the scenes, but they’re making payments more efficient and they’re reducing fraud, which is keeping more money in the ecosystem for everybody. So it does seem like they’ve got a strong capability. I’m open-minded to taking a starter position. Do you think we should do that before earnings?
Albert: Well earnings are in two days, so we need to be quick. And I agree, I’m keen on opening a starter position as well and then maybe building on that if they can grow out of this concentration risk. So are we both buying?
Luke: Yeah, I think so. I’ve just had a realization though. I can’t buy for three days. I’m still bound by my company’s compliance rules and it’s just too painful to try and get approval in two days, get it done and submit the paperwork. I’m out of there on Wednesday, so maybe I’m just going to wait. I’ve got a bunch of trades I’m going to do as soon as I shut down and hand in my laptop on Wednesday afternoon, including trimming Tesla, but probably picking myself up some Marqeta at the same time.
Albert: Wow, fantastic. I have an opportunity to get in there before you, I should take it.
Luke: I am actually, if I’m really honest and we’re going to cover this in next week’s episode, I’m a little concerned for myself that I might suddenly start overtrading once I’m no longer bound by onerous legacy compliance rules that require two human beings to approve my trades.
Albert: It’s possible, Luke, and I’ve had this problem myself when I stopped working a few years ago and you really need to be more disciplined and maybe set rules for yourself. Maybe say to yourself, I can only trade once a month or something like that.
Luke: We said it in the past, but I might genuinely have to implement this. If you’re up for it, I might use you as my compliance department. Just need to acknowledge my trades on WhatsApp and make sure I’m doing it for the right reason.
Albert: And like your compliance department, I will take two days to respond.
Quote
Albert: Anyway Luke, do you have a quote for us to end the episode?
Luke: Yeah, I do and I found a good sort of tongue-in-cheek one, but there’s actually a, quite an important point behind this too. It was quoted by a chap called Earl Wilson, who is an American journalist and gossip columnist back in the fifties, I think. Earl said, ” If you think nobody cares if you’re alive, try missing a couple of car payments.”
Albert: That is totally true.
Luke: At the time of your death, your creditors are probably at the top of the line to make sure they get paid out.
Wrap
Albert: Well, that’s all for this week. Thanks for listening.
Luke: If there’s a future topic, you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope or you can email us at feedback@telescopeinvesting.com.
Luke: We say it every week, but once again, one of the best ways you can show support for the podcast is to leave us a review on Apple Podcasts. Guys, we’ve got 11 reviews at the moment, that’s a woeful number and it hasn’t moved in the last couple of weeks. If you’re enjoying our content, stick your head in and give us a star rating.
Albert: And also, if you have a friend who you think would also get value from Telescope Investing, we would love it if you could take a moment now to spread the word and send them a link.
Luke: Actually that ask is working. I can see we’ve added quite a few subscribers in the last couple of weeks. So thanks if you did forward on the invite to a friend and actually in next week’s episode, we’re going to do listener questions. So if you’ve got a burning question as a new or as an old subscriber, drop us an email at feedback@telescopeinvesting.com, and we’ll see if we can give you our seasoned view.
Albert: Good stuff, Luke. Thanks.
Luke: Thanks, Alb.
