This Fintech stock has 1 dark cloud on the horizon
Credit and debit card issuing company Market (MQ -7.52%) is an upcoming fintech; it helps power the payment technology behind many of the popular apps you use today. But the stock has had a rough run since its June 2021 IPO, falling 78% from its high. That drop is not necessarily a direct reflection on the quality of the business; after all, what growth stock isn’t significantly reduced in 2022?
But a potential problem on the horizon could keep Wall Street from rushing back into the stock, even if the broader market turns higher in the coming months. Here’s what investors need to know and why Marqeta’s share price may disappear for a while.
A reminder of how cheap Marqeta’s shares are
I could roll out traditional valuation calculations to illustrate how cheap Marqeta’s shares are; for example, the company’s price-to-sales ratio (P/S) is now 6.1, the lowest since the company went public. But the stock has only been public for a little over a year, so how much of the story does it tell?
Instead, consider this: The company has a market capitalization of $4 billion, but has $1.6 billion in cash on its balance sheet against zero debt. In other words, a whopping 40% of the market value is cash! Compare that to some of your favorite stocks and you’ll quickly realize just how extreme it is. Shopify has also had a tough year, with the stock down 77% since January. Nevertheless, after deducting debt, just 15% of the market value is in cash. Marqeta seems priced for a potential bankruptcy.
But that is not the case; the business has generated $24 million in free cash flow in the past year, so the cash is enough to ride out a tough economy — meanwhile, Marqeta’s card-issuing software powers some of the most innovative apps consumers use today.
This can be a problem
It seems logical that Marqeta’s stock could see a big bounce as the financial picture improves and investors warm up to growth stocks again. However, there is a potential dark cloud hanging over the company that could spin the stock upside until there is some clarity in the situation.
See, Marqeta makes one ton business with fintech players Block, the company behind the Square system for businesses, and Cash App, the money app for consumers. Block contributed 69% of Marqeta’s total net revenue in the second quarter, and this high concentration has been the case since the company went public. Block was 72% of revenue in Q2 2021, so even though the concentration fell in the last year, it is still very high.
The two companies have an existing contract that expires in December 2024 for the Square portion of Block’s business and March 2024 for the Cash App side of the business. At some point between now and then, investors will find out whether the two companies will expand their relationship.
It’s a complicated case with a wide range of outcomes, including extending the agreement to terms similar to the current contract, extending the contract to terms less favorable to Marqeta, or Block ending the relationship if it were to build an internal replacement for Marqeta’s technology.
What should investors do?
That is why the share price may disappear until there is some clarity around Block; sure, the stock is cheap now, but if the company loses 69% of its revenue overnight, it changes everything about the stock. That doesn’t necessarily mean Marqeta would be doomed; Twilio and Uber technologies went through a similar divorce several years back, and the resulting crash in Twilio’s stock turned out to be a long-term buying opportunity.
However, there is a significant risk that investors should be aware of. The good news is that Marqeta’s stock is so cheap that it could lose Block, and the valuation would potentially remain at least logical, even if it killed a lot of short-term upside in the stock. Investors should manage their risk tolerance and approach Marqeta as a long-term investment. While Marqeta may eventually recover from a hypothetical breakup with Block, it could take years for the company to recoup those earnings if the worst-case scenario occurs.
Justin Pope has positions in Marqeta, Inc. The Motley Fool has positions in and recommends Block, Inc., Shopify and Twilio. The Motley Fool recommends Marqeta, Inc. and Uber Technologies and recommends the following options: long Jan 2023 $1140 calls on Shopify and short Jan 2023 $1160 calls on Shopify. The Motley Fool has a disclosure policy.