Reducing Our Marqeta Valuation; Lowering Our Uncertainty Rating on Block Contract Renewal

Returning to no-moat-rated Marqeta MQ following earnings and the announcement that it had extended its contract for Block’s Cash App card to 2027, we are reducing our fair value estimate to $7.20 from $10 per share and changing our Morningstar Uncertainty Rating to Very High from Extreme. Marqeta is deeply reliant on Block, with 78% of its net revenue coming from the other firm, so we had expected the firm to make concessions, but the 40% reduction in Marqeta’s take rate on a gross margin basis in the new contract was more than we had anticipated. The reduction in our fair value estimate is purely due to lower revenue and gross profit estimates from Marqeta’s Block relationship as the firm loses scale against its fixed costs. As a result of our new projections, we now expect Marqeta to remain unprofitable on an annual basis until 2028.

Additionally, as part of the new contract, Block will now directly handle the relationships with the card networks themselves. While there is no direct bottom-line impact to this change, it does mean that Marqeta’s own negotiations with the networks will be more difficult as it now controls a fraction of the volume it once did. There will also be a dramatic change in Marqeta’s cost structure as the firm will no longer report the collection or payment of card network fees on its income statement, leading to lower reported revenue and wider gross margins in future quarters.

On a more positive note, the four-year extension of the contract does remove a major overhang from the firm, as a failure to extend the contract could have rendered Marqeta’s business model unworkable. While there are still significant risks associated with Marqeta, the firm remains unprofitable and the contract extension does not resolve its underlying client concentration issue, the worse case scenario has been avoided and the firm has gained four years of breathing room to work on diversification.