Marqeta Earnings: Narrower Margins Are a Headwind, but Concentration Risk Remains Marqeta’s Top Issue

No-moat-rated Marqeta MQ reported first-quarter earnings in line with our expectations, though margins did show downward pressure from recent contract renewals. Net revenue increased 30.8% from last year and 6.6% from last quarter. Meanwhile, net losses increased to 14% from last year to $68.8 million, though this includes $32 million in one-time compensation expenses associated with the acquisition of Power Finance. As we incorporate these results, we do not plan to materially alter our $10 fair value estimate for Marqeta.

While shares of Marqeta are trading well below our fair value estimate, we highlight our Extreme Uncertainty Rating to investors as Marqeta suffers from severe concentration risk. Marqeta receives the majority of its revenue from its relationship with Block, which is up for renewal in 2024. If Marqeta is unable to renew these contracts, the loss of revenue and scale would be devastating for its business model. Even if Marqeta retains the relationship, we believe Block has more market power than Marqeta during negotiations, which could lead to large concessions. While management’s optimistic comments on its business pipeline are good to see, we expect Marqeta’s near-term performance will rely entirely on the fate of its Block business.

Marqeta’s total processing volume, the main driver of its revenue, rose 37% from last year and 6% sequentially to $50 billion. While this is good growth, the contracts Marqeta renewed last year with the networks and some of its clients have led to pressure on its margins. Gross income increased only 19% from last year and 2.3% from last quarter to $89 million. This led Marqeta’s operating margin to fall to negative 40% from negative 29% last year. While Marqeta’s operating efficiency plans, which include $40 million to $45 million in annual cost reductions, are appreciated, we expect the firm’s margins to face further headwinds.