IPO Momentum: A Strong Finish to Q2 and a Promising Q3

The initial public offering (IPO) landscape is demonstrating increasing activity as the second quarter concludes, with expectations for even greater volume in the third quarter.

This assessment stems from recent IPO submissions, including those from Monday.com, a provider of enterprise planning and communication tools, and several special purpose acquisition company (SPAC) mergers involving companies like Bird (scooter sharing) and Bright Machines (AI-powered microfactories).

Upcoming IPOs

Squarespace, a platform for website design and hosting, is slated to begin direct listing this week. Furthermore, Oatly, a producer of pressed grain beverages, and Procore, a construction technology firm, are expected to finalize pricing and complete traditional IPOs within the coming days.

Marqeta, specializing in card issuing and payment technologies, filed its IPO paperwork last week. This morning, Flywire, a global payments company, announced its price range for its upcoming debut.

We will focus on Marqeta and Flywire in this analysis, examining them in separate segments.

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Recent declines in public equity values and a compression of market multiples have been observed across both technology stocks and the broader market.

Despite this, numerous companies are proceeding with listing plans, indicating a belief that the current environment remains conducive to successful exits. A gradual decrease in the valuation of technology revenue is not hindering what could become a robust IPO market through the remainder of the year.

Let's concentrate on Marqeta, a highly regarded fintech company, though its infrastructure-focused business model makes it less publicly recognized than some of its competitors.

Understanding Marqeta's Business

Marqeta provides the underlying payment card technology for widely used products, notably including Square, a significant client and a key contributor to the company’s growth.

The company possesses several noteworthy characteristics common in the fintech sector, such as a substantial portion of revenue derived from interchange fees, operating within a highly competitive landscape. These aspects make a detailed examination of Marqeta particularly compelling.

Marqeta’s strengths, like its rapid revenue expansion, are intertwined with its vulnerabilities, such as a concentration of revenue from a limited number of customers. This interplay creates a complex and intriguing picture revealed in the company’s IPO filing.

We will begin with a concise overview of Marqeta’s operations before delving into a thorough analysis of its financial performance.

Understanding Marqeta's Operations

In contrast to many organizations preparing for an initial public offering, Marqeta is notably clear in articulating its core function. As stated in their S-1 filing, Marqeta delivers “a single, global, cloud-based, open API Platform for modern card issuing and transaction processing.”

This business model successfully garnered approximately $527 million in private investment from firms including Spark Capital, Goldman Sachs, and CommerzVentures. PitchBook also indicates a series of investments from strategic partners, culminating in a recent valuation of around $4.3 billion.

Marqeta outlines three core competencies: card issuing, transaction processing, and application development. These encompass the creation and administration of both physical and digital cards, the facilitation of payments, and software solutions for fraud prevention, regulatory adherence, and related functions.

From a revenue perspective, Marqeta utilizes a “usage-based model” directly tied to processing volume. The majority of income is derived from interchange revenues. Additional revenue streams include “processing services,” such as monthly platform access fees, ATM charges, fraud detection, and tokenization services.

Square represents a significant client for Marqeta. However, the company also highlights partnerships with prominent businesses like DoorDash, Instacart, and Klarna, as detailed in their IPO documentation.

Is the core concept understood? Excellent. Let's now examine the financial performance resulting from these operations.

Evaluating Marqeta as a Business Venture

The assessment is largely positive, though certain considerations warrant attention.

Marqeta has demonstrated substantial revenue expansion, increasing from $143.3 million in 2019 to $290.3 million in 2020, representing a 103% increase. More recently, revenue climbed from $48.4 million in Q1 2020 to $108 million in Q2 2021, a growth rate of approximately 123%.

This rapid revenue acceleration is a significant positive indicator.

The company has also successfully reduced its financial losses over time, moving from a net loss of $58.2 million in 2019 to $47.7 million in 2020, a decrease of 18%. Further improvement was seen from a $14.5 million loss in Q1 2020 to $12.8 million in Q1 2021, a reduction of around 12%.

A declining loss trajectory and potential for profitability are encouraging signs.

Notably, Marqeta has improved its adjusted EBITDA, decreasing losses from $34 million in 2019 to $15.4 million in 2020. Furthermore, the company achieved positive adjusted EBITDA of $1.6 million in Q1 2021, compared to $10.4 million loss in Q1 2020.

This shift indicates improved operational efficiency and market positioning.

What factors are contributing to this revenue growth and subsequent financial improvements? The following table details the company’s revenue breakdown and percentage changes between Q1 of the previous year and Q1 of the current year:

The results are compelling, aren’t they? Both reported revenue categories experienced growth exceeding 100% in the first quarter. This level of expansion is remarkably strong. Adding to the positive outlook, Marqeta began generating positive operating cash flow in 2020 and reported positive free cash flow in Q2 2021.

In essence, the company’s core revenue streams are expanding rapidly, adjusted profitability has been achieved, and GAAP losses are diminishing. This constitutes a robust financial profile.

However, it’s crucial to consider potential drawbacks:

• The conversion rate of total processing volume (TPV) to revenue is decreasing. This rate fell from 5.4% in Q1 2020 to 4.5% in Q1 2021.
• Marqeta’s success is significantly tied to the performance of Square. Company filings reveal a substantial dependence: “For the years ended December 31, 2019 and 2020, we generated 60% and 70% of our net revenue from our largest Customer, Square. For the three months ended March 31, 2020 and 2021, we generated 66% and 73%, respectively, of our net revenue from Square.” Square’s growth, therefore, heavily influences Marqeta’s trajectory.
• The company relies heavily on a single banking partner. According to its S-1 filing: “A significant portion of our payment transactions are settled through one Issuing Bank, Sutton Bank. For the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, approximately 97%, 96%, 95%, and 94%, respectively, of TPV was settled through Sutton Bank.” This concentration presents a risk.
• Marqeta utilizes a dual-class share structure, potentially limiting shareholder influence on company decisions, including planning, operations, and executive compensation.

While some of these concerns may appear minor, maintaining take-rates is vital for businesses operating on volume; customer concentration poses a genuine risk, as demonstrated by the experiences of Twilio and Affirm; bank failures are a possibility; and dual-class shares can restrict access to major market indices. These are legitimate points of consideration.

The extent to which investors will balance these concerns against the company’s recent financial achievements remains to be seen. Further clarity will emerge with the announcement of Marqeta’s initial IPO price range.