Marqeta

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Marqeta, Inc. creates digital payment technology for innovation leaders. It operates a modern card issuing platform, enabling businesses to create configurable and innovative payment card programs. However, due to its dependency on a few key customers and increasing competition, its moat is considered narrow.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Marqeta operates a card issuing platform designed for modern card programs. It provides an infrastructure for businesses to design, test, and manage payment card programs.

  • Revenue Distribution: Marqeta primarily generates revenue through interchange fees, usage-based fees on transactions processed, and other service-related fees.
  • Recent Earnings Reports show that Total Processing Volume (TPV) from “bigger” (high-volume) customers like Uber, DoorDash, and Instacart increased by 48% Y/Y (however this metric is quite outdated and will be more relevant once Q1 2024 data comes).
  • Revenue Model:
    • Interchange Fees: The largest component of Marqeta’s revenue comes from interchange fees, collected from merchants for processing card transactions.
    • Processing Fees: Marqeta charges fees based on the volume of transactions processed through its platform.
    • Other Service Fees: This category may include fees for fraud monitoring, data analytics, and other value-added services provided to clients.
  • Industry Trends: The payments industry is experiencing rapid innovation, with the rise of digital wallets, buy-now-pay-later services, and increasing demand for customizable card solutions. The shift towards digital and contactless payments is a significant trend.
  • Margins:
    • Gross margins is around 45% due to reductions in revenue and an increasingly competitive environment that have taken place.
    • The company is focused on achieving positive EBITDA, but has not yet made profit.
  • Competitive Landscape: The competitive landscape includes established payment processors, legacy processors, and other fintech companies offering similar card issuing services. Competition is intensifying, particularly in newer segments like modern card issuing, with more providers entering the market. Key competitors include:
    • Fiserv (First Data): It also operates as a technology provider to financial service firms.
    • Global Payments: Provider of technology and software solutions for payment processing.
    • Adyen: A global payments platform that provides businesses with online, mobile, and in-store payments solutions.
    • Block: Payment facilitator.
    • Traditional Card Networks (Visa, Mastercard, American Express): These companies may also offer direct solutions for businesses looking to customize their card programs, presenting a competitive challenge to Marqeta’s dominance.
  • What Makes Marqeta Different: The key differentiating factor is the focus on providing a modern and developer-friendly platform for customizable card programs. This allows businesses to have more control and flexibility in designing their payment card products compared to legacy solutions. Another selling point is its open API.
  • Recent Concerns/Controversies:
    • High customer concentration (Top 3 customers account for a large part of revenue, especially Block with its Cash App.)
    • Intensifying competition from both existing players and new entrants.
    • Recent issues with the Cash App business have resulted in a reduction of revenue.

Financials

  • Growth: Revenue growth has slowed down from 2022 to 2023, there was only a few percent increase in revenue in 2023 relative to 2022. For a high-growth company, this is worrying sign.
  • Profitability The business is not yet profitable.
  • Liquidity: High levels of cash due to its relative newness.

Moat

MQ’s moat is ranked a 2/5. While the company facilitates innovative card programs and has carved out a niche in the modern card issuing space, the factors weighing against a strong, durable moat are substantial:

  • Intangible Assets (Weak): Despite having a recognizable brand, Marqeta’s brand strength isn’t as prominent compared to the more well-known brands of traditional card companies, impacting its moat.
  • Switching Costs (Weak): While companies integrate Marqeta’s API into their systems, these integrations might not always be “sticky” or have “high” switching costs. Customers might switch to other providers.
  • Network Effect (Weak): It has very weak network effects because the number of vendors does not really benefit other users.
  • Cost Advantages (Weak): It doesn’t have proprietary technology so there are little to no cost advantages in the long run.

The most recent Q1 2024 earnings call (or the next one) will be very important because there may be data present that signals moat strenghtening.

Legitimate Risks

  • Customer Concentration: The company’s reliance on key customers creates risk if those customers experience setbacks, reduce their reliance on Marqeta, or decide to bring card issuing in-house.
  • Competition: The payments space is fiercely competitive, and rising competition could compress margins and erode market share.
  • Regulatory Changes: Changes in interchange fees, data security standards, or other regulations could negatively impact the company’s economics.
  • Technological Disruptions: Disruptive technologies could emerge, rendering its platform obsolete or less attractive compared to more advanced solutions.
  • Economic Slowdowns: Economic downturns or other factors affecting consumer spending could reduce TPV and impact revenue.
  • Fraud and Security Risks: Increased incidents of fraud, card breaches, and other security risks, could significantly erode the business.
  • Key Personnel: If key leaders decide to leave for some reason (for example Jason Gardner - founder), the company can suffer substantially, which decreases its resilience to economic shocks.

Business Resilience

While the above factors weigh against the business’ resilience, a few factors help somewhat:

  • Agile and Innovative: Compared to legacy competitors, the company can stay ahead of technology changes and trends in the payments ecosystem.
  • Diversification: The management can focus on diversifying its consumer base in order to eliminate dependence on a few customers.

Understandability

The business is rated a 3/5 in terms of understandability.

  • Payment processing is easy to grasp for anyone.
  • The economic nuance of having key customers like Cash App that are responsible for large portion of revenue takes deep and long analysis.

Balance Sheet Health

Marqeta’s balance sheet is rated 4/5:

  • The high levels of cash provides a buffer against uncertainty.