Marqeta: First Mover Advantage, But Stock Has Priced This In

Thesis highlight

Marqeta (NASDAQ:MQ) platform is a leading solution for issuing and processing payment cards, and is well-suited to meet the needs of commerce innovators, tech giants, and financial institutions. The company’s first-mover advantage and wide technological, consumer, and business knowledge give it a strong competitive edge. In addition, there are significant underlying trends that support MQ’s long-term growth. That said, I believe the stock has already priced in these, and investors should hold off buying the stock.

Company overview

MQ offers a prepaid debit card solution that can be used both online and in-store is provided, giving businesses a powerful tool for attracting and retaining customers.

Significant underlying secular trends that support MQ long-term growth

Long-term growth and MQ’s competitive position are supported by a number of substantial secular tailwinds. At a high level, technological and internet advancements have dramatically improved the globalization, digitization, and speed of trade. As a result of these shifts, the payments ecosystem is in dire need of digitization and transformation. In my opinion, this paves the way for significant developments in the areas of card issuing, transaction processing, and the electronic transfer of funds over the world.

The transition to digital payment methods is the one that everyone can witness happening in real time. Buying and selling online is booming. Estimates suggest that by 2026, one in four consumer purchases worldwide will be made online. When compared to the situation twenty years ago, when internet use was still relatively uncommon, I think this represents a tremendous improvement. In addition, I think COVID has hastened these transitions to digital payments as customers are compelled to use other payment methods (e.g., order food online, buy clothes via ecommerce site, etc.).

Not only are more people using digital payment methods, but those methods are also increasingly being integrated into a wider variety of consumer and commercial applications. Currently, the ability to make a payment is built right into several popular software platforms, including instant messaging and online marketplaces. In my opinion, this shift has led to software firms teaming up with payment firms to better serve the diverse payment needs of their customers in different regions.

In essence, I believe these trends are antecedents to a rise in TPV on the Marqeta Platform.

MQ is a one-stop access to modern payments ecosystem

The Marqeta platform is a cutting-edge solution for issuing and processing payment cards. The Marqeta Platform is uniquely positioned to fulfill the payment needs of commerce innovators, tech giants, and huge financial institutions, providing modern payment solutions for technology-driven, developer-led organizations in contrast to legacy infrastructure.

In a field where repeat business is invaluable and innovation reap huge benefits, I feel that MQ’s first-mover advantage has allowed it to seize a commanding proportion of the market. Since it was one of the first platforms of its kind to focus on issuing and processing, I believe that MQ has a wide technological, consumer, and business knowledge advantage over its competitors. The fact that MQ Platform has been accepted by a number of significant and leading corporations throughout the world demonstrates MQ’s first-mover advantage, as they are the types of organizations that are more likely to implement innovative and effective solutions. Some of the leading companies include DoorDash (DASH) and Uber (UBER).

Mission critical and deeply integrated

In my opinion, MQ is extremely well-integrated with customers since MQ platforms usually facilitate a crucial business procedure; in this way, MQ platforms drive essential customer journeys. As MQ continues to grow in both product and geographic scope, this partnership only strengthens. MQ also gets increasingly technically integrated into their products and solutions as clients build essential processes around the MQ tools and platform.

Data accumulated from customers aids in product development

Having a huge number of customers, in and of itself, is a distinct advantage in my opinion. MQ is able to foresee product requirements and new market openings thanks to their established network of customers and detailed understanding of transaction data. On the other hand, this gives MQ a big advantage because it ensures that it will always be ahead of competitors who are also aiming for this market. If MQ is able to rapidly introduce new features to satisfy these emerging needs, the likelihood that a customer may decide to transfer platforms will decrease.

MQ could venture to new verticals easily

In my opinion, MQ has a great potential to get many new users. More and more industries are realizing the significance of keeping up with the times in terms of card issuing and transaction processing as the market moves toward digitization. I anticipate that as MQ grows its footprint in existing categories, it will also enter new use cases and industry verticals. One simple way to do this is to build upon existing partnerships with major financial institutions that find an advantage in using the MQ platform to compete in the modern digital economy, such as JP Morgan. Aside from that, early indicators of MQ’s aggressiveness in pursuing additional verticals would be the company’s use of traditional marketing strategies including outgoing sales pitches, and industry trade fairs.

Global expansion

I expect MQ’s international expansion to quicken in the coming years, as the company is already present in 40 countries. The more users there are, the more valuable MQ becomes. Because many of MQ’s customers employ digital models that span international boundaries, a stronger international footprint is beneficial to growing the platform’s user base. If MQ were to grow internationally, it would be able to provide its Platform to customers everywhere, regardless of where they’re from or how they’re entering the market. Integrating with MQ Platform is a one-and-done deal for developers who then have access to the worldwide market and all of the tools MQ provides for that market.

Competition

MQ faces stiff competition from the likes of Global Payments (GPN), First Global Data (OTC:FGBDF), Adyen (OTCPK:ADYEY), and Stripe (STRIP) in a dynamic market.

MQ, in my opinion, offers a more adaptable and adjustable solution than older providers and a faster time to market. On the other side, legacy systems are notoriously slow to incorporate new features and technologies. What’s more, I think MQ operates in a modestly diversified market niche. It’s not uncommon for large financial institutions to rely on legacy platforms because they were built to standardize their product offerings. However, the Marqeta Platform caters to the changing card issuing market by supporting a wide range of digitally enabled use cases.

When comparing MQ to other, more cutting-edge options, it stands out as a formidable rival. First of all, MQ has a strong track record, whereas newer providers sometimes lack the necessary expertise in card issue and do not have a comparable history of success. In addition, newer providers whose primary focus is on acquirer processors have to invest resources in areas beyond their core competency in order to enter the card issuing market. Businesses that need card issuing and transaction processing services tend to be less interested in solutions from new suppliers because of differences in go-to-market strategies and technology capabilities among these players.

Valuation

My model suggests a price target of $6.85 in FY23, which makes the stock fairly valued today. This assumes modest revenue growth in the near-term, and the forward earnings multiple will be 1.8x in FY23e.

Given the strong secular trend, I believe MQ will be able to grow over the long-term, but there would be heavily near-term pressure. I agree that the valuation multiple has been beaten down lately since the start of the rate hike, and there is a chance of mean reversion. That said, until there are near-term catalysts in sight, I think short-term stock performance will not be great (i.e., no mean reversion catalyst).

Risk

Post-covid impact on growth

In addition to the tremendous expansion that MQ had experienced even before the pandemic as a result of the converging industries of software and payments, the pandemic ushered in an additional wave of rapid expansion as use cases for MQ took off during lockdowns. As it is still unknown if the pandemic sped up growth, or it is a one-time happening, I expect near-term outcomes to be highly volatile.

Regulation on interchange

Marqeta relies heavily on interchange fees, which are established by card networks and are occasionally governed by government. To maximize these costs, Marqeta only collaborates with issuing banks that are not subject to Durbin, where rates are much higher than regulated rates. Sales and profitability for MQ are at risk if its issuer partners lose this exemption. As an added complication, card networks may impose unfavorable regulations or fee tables for Marqeta’s offerings.

Conclusion

MQ’s Marqeta platform is a leading solution for issuing and processing payment cards. The company’s first-mover advantage, as well as its extensive technological, consumer, and business knowledge, give it a significant competitive advantage. Furthermore, significant underlying trends support MQ’s long-term growth.