For some companies, relying on a huge customer is a double-edged sword.

Credit and debit card-issuing company Marqeta ( MQ -7.52%) is an up-and-coming fintech; it helps power the payment technology behind many of the popular apps you use today. But its stock has had a tough go since its June 2021 initial public offering, falling 78% from its high. That drop is not necessarily a direct reflection on the quality of the business; after all, what growth stock isn’t down substantially in 2022?

But a potential problem on the horizon could keep Wall Street from rushing back to the stock, even if the broader market turns higher in the coming months. Here is what investors need to know and why Marqeta’s share price could languish for a while. A reminder of just how cheap Marqeta’s stock is

I could roll out traditional valuation metrics to illustrate how cheap Marqeta’s stock is; for example, the company’s price-to-sales ratio (P/S) is now 6.1, the lowest since the company went public. But the stock’s only been public for just over a year, so how much of a story does that tell?

Instead, consider this: The company has a market cap of $4 billion, but holds $1.6 billion in cash on its balance sheet against zero debt. In other words, a whopping 40% of its market value is cash! Compare that to any of your favorite stocks, and you’ll quickly realize how extreme that is. Shopify has also had a rough year, with its stock falling 77% since January. Still, after subtracting debt, just 15% of its market value is in cash on its books. Marqeta seems priced for a potential bankruptcy. But that’s not the case; the business has generated $24 million in free cash flow over the past year, so its cash is plenty to ride out a rough economy — meanwhile, Marqeta’s card-issuing software powers some of the most innovative apps consumers use today. This could be a problem

It seems logical that Marqeta’s stock could see a big bounce as the economic picture improves and investors warm up to growth stocks again. However, a potential dark cloud is hanging over the company that could muzzle the stock’s upside until there is some clarity on the situation.

See, Marqeta does a ton of business with fintech player Block , the company behind the Square system for businesses, and Cash App, the money app for consumers. Block contributed 69% of Marqeta’s total net revenue in the second quarter, and this high concentration has been the case since the company went public. Block was 72% of revenue in Q2 2021, so although the concentration fell over the past year, it’s still very high.

The two companies have an existing contract that expires in December 2024 for the Square part of Block’s business and March 2024 for the Cash App side of the business. At some point between now and then, investors will find out whether or not the two companies will extend their relationship.

It’s a complicated matter with a wide range of outcomes, including extending the deal at similar terms to the current contract, extending the contract at less favorable terms for Marqeta, or Block terminating the relationship if it were to build an in-house replacement for Marqeta’s technology. What should investors do?

That’s why the stock price could languish until some clarity around Block arrives; sure, the stock is cheap now, but if the company loses 69% of its revenue overnight, that changes everything around the stock. It doesn’t necessarily mean Marqeta would be doomed; Twilio and Uber Technologies went through a similar divorce several years back , and the resulting crash in Twilio’s stock proved to be a buying opportunity over the long term.

However, it’s a significant risk that investors should remain aware of. The good news is that Marqeta’s stock is so cheap that it could lose Block, and the valuation would potentially remain at least logical, even if it killed a lot of short-term upside in the stock. Investors should manage their risk tolerance and approach Marqeta as a long-term investment. While Marqeta could eventually recover from a hypothetical breakup with Block, it could take several years for the company to make up that revenue if the worst-case scenario comes to pass. Should you invest $1,000 in Marqeta, Inc. right now?

Before you consider Marqeta, Inc., you’ll want to hear this.

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source This Fintech Stock Has 1 Dark Cloud on the Horizon

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