Marqeta’s stock price has taken a beating over the past six months, shedding 29.3% of its value and falling to $3.84 per share. This may have investors wondering how to approach the situation.

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than MQ and a stock we'd rather own.

Why Is Marqeta Not Exciting?

Founded by CEO Jason Gardner in 2009, Marqeta (NASDAQ: MQ) is an innovative card issuer that provides companies with the ability to issue and process virtual, physical, and tokenized credit and debit cards.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Marqeta’s sales grew at a weak 2.9% compounded annual growth rate over the last three years. This fell short of our benchmarks.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Marqeta’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

3. Operating Losses Sound the Alarms

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Marqeta’s expensive cost structure has contributed to an average operating margin of negative 8.9% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Marqeta reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Final Judgment

Marqeta isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 3.2× forward price-to-sales (or $3.84 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. Let us point you toward TransDigm, a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Would Buy Instead of Marqeta

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