Why Marqeta Rallied on a Down Day for Tech Stocks

What happened

Card Issuance Technology Company Stock marqueta (MQ -0.13%) rallied Thursday, as much as 9.8%, before settling at a 3.3% gain at 12:11 p.m. m. ET The move was especially notable as heavy technology Nasdaq Composite it was down 1.3% at that time.

The reason was pretty clear: Marqeta, which is a high-growth company that is losing money, announced a $100 million share buyback authorization.

And that

You don’t normally see high-growth fintech or software companies buying back shares at this stage of their corporate lives. Marqeta’s innovative card issuance platform is still in high-growth mode, with revenue up 53% in the last quarter. With Marqeta continuing to accrue client earnings, expanding geographically and having penetrated less than 1% of its global opportunity, it also continues to invest, so its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) are negative, at the same time. of about $10 million last quarter.

High-growth companies that lose money often don’t buy back shares, as their valuable money is typically put into growth investments or acquisitions to expand their reach. Fortunately for Marqeta, it went public at a good time for growth stocks, in June 2021, at a price of $27, raising $1.2 billion at the time.

As of last quarter, the company was pretty flush with cash, at about $1.7 billion, with no debt. Against that amount of cash, Marqeta’s EBITDA losses are very modest. So, with the stock now below $8 a share prior to today (less than a third of the IPO price) and with its cash levels representing almost 40% of its $4.4 billion market capitalization , a buyback seems to make sense.

Shares of Marqeta had slumped this year with many growth tech stocks, but pulled back after its recent earnings report, despite beating expectations from its operating results. That’s because investors were concerned that outgoing founder and CEO Jason Gardner would announce that he was stepping down to become CEO. Still, Gardner maintains that he will remain active in the company as chairman and as Marqeta’s largest shareholder.

In the press release, Gardner said:

The share buyback program demonstrates the confidence that our Board of Directors and management team have in the strength of our business and future growth prospects. … We see a specific opportunity over time for us to execute a share repurchase program as we do not believe our current valuation is reflective of our long-term performance or market opportunity. Our strong balance sheet with $1.7 billion in liquidity allows us to execute this program while continuing to invest in organic and inorganic opportunities to grow the business.

Now what

While $100 million isn’t that big (the company could cash out 2.2% of its stock at these levels), it’s certainly a good sign that management thinks its stock is incredibly cheap. In 2022, high-growth stocks got crushed as inflation and interest rates rose. In the long run, however, one would expect inflation to eventually reach the Fed’s 2% target. Therefore, the performance of Marqeta’s shares will likely be tied to its long-term earnings growth.

Investors shouldn’t invest in Marqeta just because the CEO thinks the stock is cheap. After all, look what happened to ill-timed buybacks in Bed bath and beyond. Investors should invest in Marqeta based on its competitive advantages and future growth potential compared to where the shares are traded. I agree that the stock is quite undervalued at these levels, but investors should research the company for themselves to decide that.

Billy Duberstein has positions in Marqeta, Inc. and has the following options: short September 2022 $7.50 puts in Marqeta, Inc. His clients can own shares of the companies mentioned. The Motley Fool recommends Marqeta, Inc. The Motley Fool has a disclosure policy.

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