Description

Summary

GDOT is a $2B market cap fintech provider positioned to benefit from a revenue base diversifying toward B2B customers and exposure to the fast-growing, highly-valued secular market shift toward digital-only banking (neobanking) that could drive shares to ±2x in 2022. GDOT that delivers banking services to consumers, neobanks, and some of the largest companies in the US. GDOT is well-positioned in neobank industry as it is a bank holding company with a >90K-store retail footprint; this allows GDOT to compete directly with and also white label for neobanks. Its legacy businesses and debt-free balance sheet provides significant cash flow, which has recently been reinvested into the business to market GDOT's new neobank, GO2Bank, and for technology upgrades. Given these investments, margin expectations were recently downgraded and shares have followed; this has provided investors with an opportunity to invest in GDOT a depressed levels as the business will eventually inflect to grow higher LTV active accounts, driving revenue growth and, given operating leverage, margin expansion. I believe shares could appreciate materially and estimate GDOT’s SOTP value justifies a return to the $50+/share at which it traded only months ago, while stronger execution from its seasoned management team could ratchet operating performance and valuation alike, driving share value toward $85. GDOT currently trades at $34/share.

Brief Description

Green Dot Corporation (NYSE:GDOT) [IPO’ed July 21, 2010 at $36/share] is a financial technology and registered bank holding company (“BHC”) facilitating electronic payments via debit, prepaid, checking, credit and payroll cards, as well as money processing services, such as tax refund processing, cash deposits, and disbursements. Revenue streams include: (i) card and other fees for cardholders and on the B2B services side, fees for use of GDOT’s tech platform and program management (~51%); interchange fees that merchants pay when a card is used for purchases (28%); processing and settlement services for cash transfers (including deposits at retailers); payroll, employer disbursements, and tax refund advances/processing (20%); and interest income (1%).

History and Situation Overview

GDOT was founded in 1999 by Steve Streit and historically focused on the general purpose reloadable (“GPR”) card market targeting the un-/under-banked population. GDOT competed against the likes of NetSpend, but differentiated from competitors by acquiring a bank in the early 2010s. Under its bank charter, GDOT serves as the providing bank for its own checking accounts, which allows them to, for example, offer FDIC insurance, direct deposit, etc. without giving up economics to a bank partner. They sell these cards primarily via retail partners, such as Walmart, Dollar General, CVS, etc., which has blossomed into a >90K-store network – effectively, the largest domestic banking branch network – where GDOT customers can buy cards and transfer money.

In recent years, Streit diversified GDOT’s revenue base by establishing a banking-as-a-service (BaaS) business, where GDOT white-labels its BHC/banking services for primarily consumer brands and employers, which often have a higher rate of direct deposit opt-ins, materially expanding the account’s LTV. Examples include the Walmart MoneyCard, on which Walmart customers receive special offers, and the Uber Business Debit card, on which Uber’s gig workers can receive direct deposits of daily earnings without delay. In 2019, GDOT began to face intensified competition – GDOT downgraded guidance multiple times as they attempted to fend off and out-deliver low-/no-cost card competition from the fast-growing, VC-funded neobanks and even Paypal/Venmo, Square/Cash App, etc. (i.e., higher CAC, slowed active accounts growth). In October 2019, Streit retired amidst share pressure (-64% in the previous 12 months vs. a peer median of +23%) and despite the removal of a significant overhang when GDOT extended its Walmart MoneyCard contract for 7 years. In February 2020, Starboard Value announced a 9%+ position, which it currently maintains, and in March 2020, GDOT announced PaySign (PAYS) Chairman, former NetSpend CEO, and Euronet Co-Founder Dan Henry as the new CEO. Henry received Starboard’s public support, initiated cost savings measures, began to upgrade/unify GDOT Bank’s tech platform, and announced that GDOT will reposition its multiple consumer offerings under its very own neobank, GO2Bank, expected to launch early 2021. In the intervening months, GDOT shares more than doubled as the secular shift to digital banking accelerated and several COVID-19 stimulus payments drove operating performance. 2020 results showed GDOT reaching all-time highs across many key metrics, with active accounts ranging between 5.5-6.3M (+9 Y/Y), gross dollar volume (GDV) of $58B, or +34% Y/Y vs. a +24% CAGR pre-COVID, and purchase volume of $31B+, or +16% Y/Y after a +4% year in 2019. Additional BaaS accounts drove significant growth, while some sub-segments suffered from COVID closures/lock-downs/slow-downs, such as the Uber account. Overall, revenue grew at mid-teens percent, a lift from the +4% in 2019, while Adj. EBITDA margin was compressed to mid-teens percent as GDOT invested record revenue and other cost savings into the aforementioned unified banking/card management system, which is expected to drive margins in 2022. In January 2021, GO2Bank launched and has shot up quickly in app stores with positive reviews among other large neobanks, such as Chime, MoneyLion, Varo, Current, Dave, etc.

Investment Thesis

GO2Bank stands to capture share in the growing, highly-valued neobank market, which will provide tremendous value. Management has guided to ARPU of $200 on these accounts that go beyond lower-income un-/under-banked consumers to target a broader millennial-to-Gen-Z demographic (note: the legacy consumer business already generates ARPU of $170+). This ARPU compares favorably to other neobanks which were popular SPAC target over the past year at huge multiples, such as MoneyLion (1.1M users, $65 annual ARPU, acquired at >9x forward revenue), Dave (3.5M, $38, >9x), and Acorns (3.5M, $22, >7.5x). While not a perfect comparison, consider GDOT’s broader consumer business: 4M, ~$170,

On the B2B side, GDOT has more than tripled quarterly BaaS revenue in just the past 2 years as it further penetrated its customer base and won new business. With logos including Walmart, Amazon, Uber, and Apple, GDOT is in prime position to continue winning new partnerships. With significantly lower growth and lower margin peers valued significantly higher (e.g., Q2 Holdings at >8x revenue and Jack Henry at ~6.5x), the continued growth and eventual mix shift toward B2B should allow GDOT to argue for a multiple re-rate.

Valuation

As GDOT continues to lap stimulus payments and invest in marketing and tech, shares have traded off significantly and currently reside at $34.20/share (6.8x 2022E EBITDA). On an SOTP basis, GDOT seems significantly undervalued:

GO2Bank

If GDOT reaches 250-400K active GO2Bank accounts in 2022 at an ARPU range from ~$170 (prevailing ARPU in GDOT’s consumer business) to $200 (guidance), respectively, GDOT will produce revenue of $43-80M; valuing this at 3-5x revenue, which is approximately half the levels of recent neobank SPAC deals, GO2Bank will be valued at ~$128-400M.

B2B

Continued growth in the B2B business should see 2022 revenue reaching $550-575M, by my estimate – at multiples steeply discounted from those of other banking service providers (2-4x), the B2B business should be worth ~$1.1-2.3B.

RATR

I value this business using a 5-year DCF, where revenue is grown at the current CAGR of the number of transfers processed, 6%, and stepped down to 2% growth thereafter. I expect transfers processed to accelerate from its 6% CAGR as the neobank market grows, but leave it flat for conservatism. I further assume cash flow is generated at the reported money processing contribution margin of ~26% and tax effected at the guided 23% rate. Discounting this using a 7-9% WACC range, which brackets yet skews high vs. GDOT’s current level, the RATR business is worth ~$850M-1.2B.

Remainder

Valuing the remaining business’s 2022E EBITDA, ~$80M, at a range of GDOT’s historical fwd. EBITDA multiples, 5-10x, equates to a value of $400-800M.

Total Value

Adding unencumbered cash ($153M + 4Q21E FCF of $28M) and the carrying value of GDOT’s share of its TailFin Labs JV with Walmart ($62M) to the range of values above, GDOT’s implied value per share is ~$47-85, a ~37-148% premium to its current per share value. This is a dynamic situation – the valuation range reflects this. Still, I believe this is an asymmetric opportunity with a reasonable path to significant share price appreciation.

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Catalyst

• B2B wins and earnings updates demonstrating the mix shift
• Disclosure around consumer/GO2Bank active accounts and unit economics
• Increases in cash transfers at RATR