Marqeta, whose platform offers card-issuing and payment-processing services, is the latest in a long list of tech startups going public in 2021. It's slated to list on the Nasdaq and begin trading on Wednesday.

Financial technology companies in particular have garnered significant investor interest this year, perhaps pushing more startups to go public. Two other payments-related companies, Flywire (FLYW) and Paymentus (PAY) recently went to market. Flywire's stock jumped about 46 per cent and Paymentus' went up about 36 per cent on their first day of trading.

Marqeta has scaled quickly, fueled by the growth of financial technology, e-commerce, and the gig economy. But its future is anything but certain.

The IPO at a glance

  • Ticker: (MQ)
  • Exchange: Nasdaq
  • IPO Date: June 8, 2021
  • IPO Price: $27 per share
  • Number of Shares Sold: About 45.5 million
  • Percentage of the Company Made Public: Less than 10 per cent
  • Amount Raised: About $1.2 billion
  • Company Valuation: About $15 billion

Marqeta's customers include well-known tech companies

Marqeta targets high-growth tech firms as its customers, which distinguishes it from established incumbents FIS (FIS) and Fiserv (FISV) that primarily serve banks and traditional credit card companies.

Marqeta's clients include familiar tech names like Square (SQ), Affirm (AFRM), Uber (UBER), DoorDash (DASH), and Instacart. These companies use Marqeta's platform to build payment experiences for their own customers or streamline business payments.

What's behind Marqeta's strong revenue growth

Most of Marqeta's revenue comes from transaction fees, so processing volume is the name of the game. Marqeta has benefited from the accelerated shift to e-commerce and digital payments brought on by COVID-19. The company's total processing volume reached roughly $60 billion in 2020, up from $21.7 billion the year before, according to the Marqeta's SEC filing. The momentum has continued into 2021; Marqeta says its platform processed $24 billion in the first quarter.

With the boost in processing volume, Marqeta brought in $290.3 million in revenue in 2020, more than double its 2019 revenue.

a chart showing Marqeta's total processing volume has skyrocketed

While the past year has been sweet for Marqeta in terms of revenue growth, we have to look at the numbers with a grain of salt because they may not be indicative of the future. COVID-19 has impacted consumer spending patterns, boosting online purchases and demand for delivery services and contactless payments. While the need for virtual payment processing and card issuing may continue to trend upward, the dramatic shift seen during the pandemic will likely subside.

Despite the boost in revenue over the past year, Marqeta isn't yet profitable. The company has shown a decline in net losses in recent years but still lost $47.7 million in 2020.

A chart showing Marqeta has grown its revenue and cut its losses

Marqeta expects to incur losses for the foreseeable future as the company continues to invest in its growth. Ultimately, the future is uncertain. And Marqeta acknowledges in its SEC filing that it may never achieve or sustain profitability.

Marqeta has a dependency problem

Marqeta's growth over the past year has mirrored the performance of its customers, particularly payments processing company Square, which generates most of Marqeta's revenue. Square was responsible for 70 per cent of Marqeta's net revenue in 2020. That percentage rose to 73 per cent for first-quarter 2021.

Square's rapid growth during the pandemic has been a boon for Marqeta, but Morningstar senior equity analyst Brett Horn sees risk in customer concentration: "This tends to be mainly a growth issue, as customers have leverage to demand better pricing."

The current term of Marqeta's agreement with Square for Square Card expires in December 2024, and the current term of their agreement with Square for Cash App expires in March 2024. There is no guarantee that the relationship will continue on the same terms.

Losing revenue from Square, whether from Square's poor performance or a severance of the relationship, would also have an adverse effect on Marqeta's business.

Market tailwinds can benefit Marqeta and competitors

Horn and equity analyst Michael Miller believe there are significant opportunities for companies like Marqeta to draft off the secular trend toward electronic payments, which would act as a tailwind to card payment volumes. Euromonitor International, a market research firm, projects electronic payments will represent 46 per cent of the total global transaction volume by 2025, up from 31 per cent in 2017.

Horn sees competition between traditional players relying on scale and better pricing while newer upstarts like Marqeta try to win with services that better fit higher-growth areas. Industry growth creates room for new players, but Horn ultimately believes scale is the best form of long-term advantage in the space. This benefits existing players, like FIS and Fiserv, and gives them a window to replicate new offerings.

Miller said the rise of buy-now-pay-later offerings is another major trend in the card payments space. Such offerings allow consumers to pay for retail goods under an installment plan. "These firms are more prominent in Europe and Australia, but they've been investing heavily in the US to gain market share," Miller said. "That said, in my view, they have a difficult path to significant adoption in the US since they don't have a clear benefit over existing credit card products already available in the country."

Marqeta already supports providers in this space, like Affirm and Klarna, and Marqeta's global presence (the company is certified to operate in 36 countries) would allow it to take advantage of this growth outside of the US.

Marqeta's potential markets are growing and evolving, and it will have to grow and evolve with them. Profitability will take a back seat as the company pursues further growth and innovation.