Marqeta’s Square Dance with Customer Concentration and Why it Might Not Matter
On Friday evening, Marqeta released its highly anticipated S-1 filing and it did not disappoint. Among a host of insights, the company doubled revenue (again) after achieving over $350 million in annualized net revenue in 2020 all while boasting over 200% in net dollar revenue retention. The nexgen card issuer also processed $60 billion in 2020 transaction volume, reported over 320 million in cards issued to date, and the ability to operate in 36 countries via its Visa and Mastercard partnerships. However, these stellar metrics are all underpinned by a sizable elephant in the room. As of March 31, 2021, Marqeta touted 73% net revenue concentration to Square, up from 70% at year-end 2020 and 67% in 2019.
Public companies are required to report any customer concentration over 10% largely due to the inherent risk of this type of exposure to any one customer. To state the obvious, customer concentration presents significant risk to a company’s top line, particularly for contracts that aren’t fully locked in for the term (like Marqeta’s contract with Square). Among many implications of customer concentration can also be susceptibility to price squeezing as substantial exposure to any business brings a power dynamic for price negotiations that aren’t always favorable to the vendor. The larger and more stable the enterprise customer, the less power vendors often have.
However, in today’s tech vacuum where strong growth and a steady path to software margins are valued over all else, does customer concentration have a material impact on valuation? Or are public equity investors less concerned with a power dynamic due to the unique and proprietary tech being sold? It doesn’t take a ton of research to stumble across a number of other tech behemoths outside of Marqeta with customer concentrations of their own including SAIC, Autodesk, Palantir, Affirm, Upstart, and Cirrus Logic — all trading at multi-billion-dollar valuations.
While many variables inform the level of risk associated with a company’s customer concentration, it can be challenging to isolate the overall impact to valuation for any given company. However, what is possible is evaluating any material deviations in valuation that could be explained by customer concentration. Specifically, by using high impact financial metrics that generally inform valuation such as scale, revenue growth, and gross margin, one can attempt to isolate deviations in valuation via a regression analysis. Put into practice, in a regression of 450 public, US based tech companies, it is possible to explain just over 50% of a given public tech company’s valuation based on these three factors alone with significant confidence. When applying this regression of three factors to the financial metrics of the aforementioned tech behemoths with significant customer concentrations, the implied valuation of every single one comes square within the 95% confidence interval of its current valuation, with the exception of Marqeta. This means that any effect of customer concentration on valuation for these actively traded companies may not be as material as one would think. In fact, many traded near the top of the regression, and Marqeta’s anticipated valuation blew completely past the upper band of the regression. But why?
Before jumping to any conclusions about a double standard for big tech, though, one could argue for the silver lining customer concentration carries with it. Specifically, if Marqeta can lock in an implied run rate contract of $300M+ with Square, imagine the opportunity within other existing clients let alone the thousands of other enterprises seeking customized virtual card payment and embedded fintech solutions. Further to this, large scale accounts with the likes of Square only help expedite the journey for rapidly growing tech platforms seeking economies of scale and a higher margin profile. Larger companies are much easier to service and manage, particularly once ramped and the relationship motion is down. Lastly, even platforms with concentrations that have lost their large accounts have survived — Twilio IPO’d and lost its largest customer Uber just a year later — the company now trades at $51 billion, up from $1.2 billion at IPO in 2016.
While Marqeta’s ultimate public market valuation and any ensuing hit from its concentration to Square is yet to be determined, one takeaway does feel particularly pronounced from all of this. Despite Marqeta’s size and first mover advantage, its market dominance is not what it might have appeared to be based on revenue size. Instead of $350 million run rate generated from thousands of customers, much of this is from just one platform. Thus, of the $6.7 trillion of transaction volume conducted through U.S. issuers in 2020, there is more market share up for grabs than most people would have imagined. Like public market reception of Marqeta’s concentration, time will tell on just how dominant the company will be in the category. That said, one thing that is inarguable is that Marqeta redefined how the world thought about virtual payments and embedded finance and there is something to be said for that.
Disclaimer: Views are my own and may not reflect those of my employer.
Sources: Capital IQ, Marqeta S-1 filing.
