Fintech Investors Are Hitting the Marqeta

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Marqeta, one of the forces behind the rapid evolution of payments and commerce, is now a public company. Investors should get to know it.

The company started trading on Wednesday following its initial public offering, and jumped 13% from its offering price. It provides what it calls “modern card issuing” to customers such as Square, DoorDash, Affirm Holdings and Goldman Sachs, facilitating the speedy issuance of a virtual or physical card to a client’s end users. For Square, that is used to help turn its Cash App into a neo-banking account with a debit card. For DoorDash, it enables deliverers to pay for the food being picked up from a restaurant.

Like other payments upstarts, it has exploded onto the scene by taking something that used to require a lot of upfront investment and specific know-how and streamlining it for more modern applications. Rather than a per-card issuance or subscription fee, Marqeta earns volume-related fees generated as cards are used and transactions are processed.

This makes it a compelling stock for investors who are eager to bet on fintech trends. Notably, if you like Square as an emerging neo-banking player, Marqeta provides a lot of exposure to that business. Square is Marqeta’s largest customer, using a variety of services related to products like Cash App and Square’s business card, and generating 73% of Marqeta’s first-quarter net revenue.

At its current price, Marqeta’s market value is about $16 billion. As a multiple of trailing-12-month revenue, Marqeta is valued at roughly 45 times, according to FactSet. That is roughly on par with Shopify, and a couple times the ratio of Adyen or PayPal Holdings Inc., according to FactSet. Investors are likely paying in part for high expectations for Square’s volumes, but even more for potentially bigger growth in Marqeta’s wider business. Up to this point, Marqeta is on a growth trajectory that may justify such a premium, with first-quarter 2021 revenue more than doubling from a year earlier.

Avenues for further growth include delivery and other gig services via customers such as DoorDash, Uber Technologies and Instacart, and buy-now-pay-later firms such as Klarna and Affirm that use Marqeta to help facilitate payments to merchants. Marqeta is working with Goldman Sachs as the bank prepares to launch Marcus checking accounts, and it works with Coinbase Global on a debit card connected to users’ crypto holdings. JPMorgan Chase is working with Marqeta on virtual commercial cards. Significant growth could also come from expanding more into credit cards, which earn higher interchange fees than debit cards, notes Bernstein analyst Harshita Rawat.

However, the correlation between commerce growth and Marqeta isn’t necessarily perfect. For one, because Marqeta generates U.S. revenue in large part from keeping a share of the interchange fees it collects, it may be vulnerable to changes in how those fees are regulated. For now, Marqeta is in a prime position because the smaller banks it works with to issue cards are allowed under the rules to earn far higher rates than big banks on debit cards. Marqeta can also collect other per-transaction fees in markets where interchange isn’t part of the equation.

Marqeta faces a fast-moving competitive landscape, as upstarts such as Adyen, Stripe and SoFi Technologies’ Galileo also provide some card-issuing services, and established firms such as Fiserv and Global Payments have units that have helped banks issue cards for many years.

Competition is a reminder to keep an eye on profitability even as volume and revenue growth is in focus since it can also subtly affect terms with customers. Marqeta’s customers typically get a larger share of interchange as they generate more volume, which incentivizes long-term relationships. As Autonomous Research analyst Craig Maurer notes, as Marqeta’s overall volume grows it also has some degree of offset to these pressures in the form of potentially better pricing from its own service providers, such as card networks and issuing banks.

Marqeta is a clear-cut way for investors to bet on the evolution and simplification of payments via big players across several sectors. But at this price, investors need to be closely attuned to the details, too.

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