Summary
- Marqeta has filed terms for its $1 billion IPO.
- The firm provides credit card issuing products and related services to businesses worldwide.
- MQ is growing rapidly, producing copious free cash flow, and the IPO appears reasonably valued, so is worth a close look.
Quick Take
Marqeta (MQ) has filed to raise $1 billion from the sale of its Class A common stock in an IPO, according to an amendedregistration statement.
The company provides customized credit card issuing and related services to businesses worldwide.
MQ is growing top-line revenue impressively, is generating strong free cash flow, has a credible path to operating breakeven, and the IPO appears reasonably valued given the firm's growth trajectory.
Company & Technology
Oakland, California-based Marqeta was founded to develop a platform to digitize commercial payments between businesses and their customers via its open APIs.
Management is headed by founder, Chairperson and CEO Jason Gardner, who was previously co-founder of PropertyBridge.
The company’s primary offerings include:
Issuing - physical, virtual or tokenized cards
Processing - transaction processing
Applications - development tools, administration, anti-fraud, chargebacks
Marqeta has received at least $502 million in equity investment from investors including 83North, DFS Services, Granite Ventures, ICONIQ, and Coatue.
Customer/User Acquisition
MQ seeks relationships with technology-forward firms via direct sales and marketing teams.
In 2020, the company processed $60.1 billion of total processing volume, an increase of 177% from 2019's result.
Compensation & Benefits expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:
Compensation & Benefits | Expenses vs. Revenue |
Period | Percentage |
Three Mos. Ended March 31, 2021 | 41.5% |
2020 | 43.7% |
2019 | 60.4% |
The Compensation & Benefits efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Compensation & Benefits spend, rose to 1.3x in the most recent reporting period, as shown in the table below:
Compensation & Benefits | Efficiency Rate |
Period | Multiple |
Three Mos. Ended March 31, 2021 | 1.3 |
2020 | 1.2 |
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
MQ’s most recent calculation was 113% as of March 31, 2021, so the firm has performed at an extremely high level in this regard, per the table below:
Rule of 40 | Calculation |
Recent Rev. Growth % | 123% |
EBITDA % | -10% |
Total | 113% |
The firm’s dollar based net revenue retention rate in 2019 and 2020 was an extremely high 200%. A figure over 100% means the firm is generating incremental revenue from the same customer cohort and indicates strong product/market fit and efficient sales & marketing efforts. (Source)
Notably, 70% of its total revenue base came from one customer, Square (SQ).
Market & Competition
According to a 2020 marketresearch reportby IBISWorld, the U.S. market for credit card issuing will be an estimated $98.9 billion in 2021.
This represents an expected average annualized market growth of 0.5% from 2016 to 2021.
The main drivers for this expected growth are a continued rise in aggregate household debt and per capita disposable income.
Also, e-commerce sales represent a strong growth vector for innovative card issuance capabilities.
Major competitive or other industry participants include:
Global Payments
Fiserv
Fidelity National Information Service
Wex
Comdata
Adyen
Stripe
Others
Financial Performance
Marqeta’s recent financial results can be summarized as follows:
Sharply growing top-line revenue, at an accelerating rate of growth
Increasing gross profit and gross margin trending upward
Reduced operating loss and net loss
Increasing cash flow from operations
As of March 31, 2021, Marqeta had $247.6 million in cash and $193.5 million in total liabilities.
Free cash flow during the twelve months ended March 31, 2021, was $74.2 million.
IPO Details
MQ intends to sell 45.5 million shares of Class A common stock at a proposed midpoint price of $22.00 per share for gross proceeds of approximately $1 billion, not including the sale of customary underwriter options.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Class A common stockholders will be entitled to one vote per share and Class B shareholders will receive ten votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into their index.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (ex- underwriter options) would approximate $10.3 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 8.57%.
Per the most recent regulatory filing, the firm plans to use the net proceeds as follows:
We currently intend to use the net proceeds that we will receive from this offering for working capital and other general corporate purposes and to fund our growth strategies, including continued investments in our business globally. We may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies, or other assets. We do not, however, have any agreements or commitments to enter into any acquisitions or investments at this time.(Source)
Management’s presentation of the company roadshow is not available.
Listed underwriters of the IPO are Goldman Sachs, J.P. Morgan, Citigroup, Barclays, William Blair, KeyBanc Capital Markets, Nomura, HSBC, R. Seelaus & Co., and Siebert Williams Shank.
Valuation Metrics
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
Measure [TTM] | Amount |
Market Capitalization at IPO | $11,665,409,822 |
Enterprise Value | $10,344,452,822 |
Price / Sales | 33.34 |
EV / Revenue | 29.57 |
EV / EBITDA | -242.11 |
Earnings Per Share | -$0.09 |
Float To Outstanding Shares Ratio | 8.57% |
Proposed IPO Midpoint Price per Share | $22.00 |
Net Free Cash Flow | $74,216,000 |
Free Cash Flow Yield Per Share | 0.64% |
Revenue Growth Rate | 123.16% |
(Glossary Of Terms) |
(Source)
As a reference, a potential partial public comparable would be Adyen (OTCPK:ADYEY); shown below is a comparison of their primary valuation metrics:
Metric | Adyen | Marqeta | Variance |
Price / Sales | 12.85 | 33.34 | 159.5% |
EV / Revenue | 15.08 | 29.57 | 96.1% |
EV / EBITDA | 142.64 | -242.11 | -269.7% |
Revenue Growth Rate | 37.1% | 123.16% | 232.33% |
(Glossary Of Terms) |
(S-1andSeeking Alpha)
The firm’s last private market valuation was reported as $16 billion, so the IPO will represent a significant decrease in valuation of approximately 35% from that valuation.
Commentary
MQ is seeking public investment as itposts impressive revenue growth results.
The firm’s financials show accelerating top-line revenue growth and gross profit growth, reduced operating losses and negative operating margin, and increasing cash flow from operations.
Free cash flow for the twelve months ended March 31, 2021, was an enviable $74.2 million.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased sharply and its Sales and Marketing efficiency rate rose slightly to 1.3x.
Notably, its Rule of 40 metric was extremely impressive and its dollar-based net retention rate of 200% was the highest I’ve seen.
The market opportunity for credit card issuing in all its forms is large and MQ appears to be quickly taking market share from existing players and parlaying its relationship with Square for company growth.
Goldman Sachs is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 40.4% since their IPO. This is a mid-tier performance for all major underwriters during the period.
The primary risk to the company’s outlook is its high customer concentration as the firm relied on Square for 70% of its total revenue in 2020. This level of concentration is unusual for a SaaS firm.
As for valuation, compared to partial comparable Adyen, MQ is pursuing significantly higher revenue multiples at IPO, but the firm is growing top-line revenue far faster than Adyen.
In addition, if reports are correct, the IPO appears to be at a lower valuation than private share sales.
MQ is growing top-line revenue impressively, is generating strong free cash flow, has a credible path to operating breakeven, and the IPO appears reasonably valued, so is worth a consideration.
Expected IPO Pricing Date: June 8, 2021.