1 Thessalonians Chapter 5 verse 11 states, "Therefore encourage one another and build each other up, just as in fact you are doing."
It always stings when I read this verse as I far too often am critical of myself as well as others, however, the Bible clearly instructs me to build others up. Emotions tend to get in the way, but that is no excuse for obeying and abiding by God's Word. Having patience, being slow to speak, and not getting frustrated all end up making every discussion more positive, healthy, and valuable.
For investing, public markets and information streams offer enough volatility and complication to frustrate anyone. Today, there is a real information war afoot. Daily there are battles that ensue, but keeping to God's Word, encouragement and valuable discussion are what will benefit investment decisions.
Two recent IPOs that I scrutinized the past week included Marqeta, Inc. (MQ) and Monday.com Ltd. (MNDY). I initiated a position in the former on Wednesday, and did not consider imitating on the latter yesterday.
Without getting too much into the nitty-gritty of each respective company's business model details, the clear rationale for my actions were predicated on valuation versus the mid-term potential. For Marqeta, I think the risk/reward proposition is much more appealing.
At the high-level, Marqeta is looking to supplant legacy issue processors within the payment/transaction ecosystem. The company is wedded to next generation economic opportunities for companies like Square, Uber, DoorDash, Coinbase, Instacart, Klarna, among others, and is embedded in their payment processes as a modern issue processor, among other service offerings.
Marqeta is a Fintech play that currently sports an EV at $15.4 billion, and has witnessed $75 billion in Total Processing Volume, TPV, on a Last Twelve Month, LTM, basis. This has led to a surge in Net Revenue from just over $140 million in 2019, to $350 million as of Q1 2021 LTM. The company's key Net Revenue driver are its Net Interchange Fees.
The market opportunity is substantial with $6.7 trillion in U.S. transaction volume alone, and $30 trillion globally as of 2019. As strong shifts afoot continue for increasingly integrated digital transaction volume, Marqeta is poised to continue to grow.
The other exciting fundamental aspect of Marqeta's business is that despite being at a lower Net Revenue scale of $350 million today, the company already sports a 22% Operating Cash Flow, OCF, margin, which is near parity with the Free Cash Flow, FCF margin.
The key investment thesis here is scalability and growth. One concern is the exposure to Square's Seller/Cash App operating segments - during 2019/2020/Q1 2021, 60%, 70%, and 73% of Marqeta's Net Revenue were derived from Square's business. But digging deeper, 2020 and Q1 2021 performance, which was substantial for Marqeta, strongly outperformed Square's Revenue growth metrics, excluding Bitcoin. Thus the conversion/penetration within Square's platforms has been very strong for Marqeta, which is important since the contractual relationship is through mid- and latter 2024, with automatic one-year renewal thereafter. With the key risk being the potential loss of this contract, faster growth within Square's segments is a strong sign of stability and longer term potential.
Marqeta only had 160 or so customers as of 2020, so it is likely that a smaller portion of customers will continue to drive performance over the mid-term, but further diversification/exposure to more customers will continue to reduce the current risk exposure with Square over time. That being said, Marqeta still has less than 1% of the $6.7 trillion U.S. transaction volume market today. Accounting for overall transaction volume growth in the U.S. combined with international growth, I am modeling Marqeta to head towards $550-600 billion in TPV over the mid-term.
In this scenario, the company would likely generate $2.3-2.5 billion in Net Revenue, and I'm considering further Cash Flow inflection towards a 30% OCF/FCF margin. While today's metrics of EV/Sales at 44 times and OCF per share at over 215 times look steep, in the above scenario, Marqeta could be worth $90 per share or so equating to an EV/sales at 22 times and an OCF per share below 70 times, not atypical for leading payment networks like Visa and Mastercard - and accounting for highly robust growth to justify it as well.
For Monday.com, the company's core product, Work OS, allows organizations to build software applications and work management tools to fit their needs. Monday.com's customer base is much more diverse with nearly 128,000 customers as of Q1 2021.
Monday.com is at an even lower Revenue amount, below $200 million for the LTM as of Q1 2021 than Marqeta. The company is currently unable to generate positive OCF/FCF. Even when affording the company a strong mid-term Revenue growth outlook towards $1 billion, and assuming OCF/FCF inflection towards 25%, I only see a justifiable Stock Price, SP towards $340. This assumes an EV/Sales metric at 20 times, and OCF/FCF multiple at 90 times, the latter being a large premium to Marqeta. As a comparison when looking at Monday.com, the risk reward just doesn't seem as lucrative for a potential annualized investment return.
To this point, Marqeta offers a 22%-23% opportunity based on the mid-term growth scenario, while Monday.com is closer to 13%. The scenario for Marqeta assumes a higher annualized Revenue growth rate at 53% from 2020 versus Monday.com's 43%, however, the market opportunity is much higher as well, and I like Marqeta's competitive chances much more so against legacy peers.
The key challenge in modeling companies like Marqeta and Monday.com is finding the right conservative approach. We can look no further than Affirm Holdings (AFRM) as an example of initially high expectations that translated to a substantial rise and collapse soon-after its IPO. Affirm's first couple of quarters have displayed more lumpiness with the latter quarter showing increasingly positive performance as a contrast to the first quarterly results as a public company. A similar pattern could emerge with Marqeta, although Wednesday's IPO did not shown as strong of a first-day pop, and thereafter has displayed more stable trading.
In the event the Stock Price, SP were to head north of $40, I would be much more concerned. I'm looking for a pullback towards the $25 level or lower to begin any accumulation for the position. I view further processing volume with existing customers, new customer wins, and international expansion being the core catalysts for mid-term growth.