Green Dot Corporation is a financial technology firm that functions like a digital bank and provides most of what traditional banks are offering in the market.

Green Dot Corporation (GDC) is a financial technology firm listed in the Nasdaq market and has all the functions of a traditional bank. It provides debit, credit, checking, prepaid, payroll cards, and money movement services such as tax refunds, cash deposits, and disbursements. GDC initiates most of its transactions through its own Green Dot Network and its deposit businesses through GO2Bank. To note, Walmart is their biggest retail distributor and GDC provides the Walmart MoneyCard product sold at Walmart. Walmart encompasses about 24% of GDC’s operating revenue in 2021 and thus is reliant on Walmart for most of its businesses. However, that percentage has steadily declined from 34% in 2019.

GDC can be divided mostly into three reportable segments namely, 1) Consumer Services, 2) Business Business (B2B) Services and 3) Money Movement Services.

1. Consumer Services: Revenue from deposit account programs such as fees on account services.
2. B2B Services: Revenue from fees for banking products distributed through other companies, and payroll systems for businesses.
3. Money Management Services: Transaction fees for consumers and businesses for money processing services and tax refunds.

Consumer Services account for the bulk of GDC’s revenue at 49.9% in 2021, followed by B2B Services (32.9%) and Money Management Services (17.2%).

GDC’s revenue growth has been solid over the past few years, but its profit margins have been declining.

GDC’s revenue grew by double digits in the past 2 years during the pandemic from US1.1 billion in 2019 to US1.4 billion in 2021, driven mainly by its Consumer and B2B Services segments. B2B Services revenue in particular grew by 1.5 times to US459 million in 2021 from US304.7 million in 2020, driven by higher active accounts and purchase volumes amid the economic stimulus programs during the pandemic. This marks the highest revenue achieved by GDC in the past 10 years. where it almost doubled its revenue from US890 million in 2017.

However, its profits profile leaves some to desire. While revenue growth has been impressive, profits actually dipped from US100 million in 2019 to US23 million in 2020, before recovering to US47 million in 2021. This translates into a mere 3.3% profit margin currently as compared to an average of about 10.0% from 2017 to 2019.

For its latest quarter in 3Q 2022, revenue growth hasn’t particularly been good too, declining at a 5.2% rate compared to 2Q 2022. Meanwhile, profits declined by 68.7% over the same period too. This could be the effects of the U.S. stimulus program being winded down and a decrease in transaction activities in GDC.

GDC share price has been on a downward trend since 2020 and 2021, due to disappointing financial results and is now trading below its historical price-to-earnings ratio.

GDC’s share price has declined by almost three quarters from its peak of US64.6 in October 2020, to US17.7 now. A series of disappointing profit results (even though revenue growth was strong) dampened its share price performance. Its current share price now is similar to the one traded before the pandemic at US22.8 on 31 Dec 2019.

From a valuations standpoint, it is currently trading at a price-to-earnings ratio of 22.6 times which is below its historical average of 42.2 times from 2017 to 2021 but above the industry average of 10.0 times. It does seem like investors are still positive about GDC’s prospects but just not as much as compared to 2020 and 2021.

GDC is valued at US21.1, with a potential upside of 8.9% and an implied price-earnings ratio of 24.6 times currently.

According to the DCF valuation, GDC is valued at US21.1 per share compared to the current price of US19.4 per share. This was valued based on these assumptions

1. Revenue growth: 5.0% and 7.0% in 2022 and 2023, and then 12.6% onwards till 2024. Historical average was 12.6% growth.
2. EBITDA margin: 15.3% according to historical average.
3. Weighted Average Cost of Capital: 6.1% based on U.S. 10 year yield of 3.9%, equity risk premium of 4.2%, and cost of debt of 7.0%.
4. Terminal Growth Rate: 1.0%.

Median target price from analysts is US23.50, more bullish than the target price from the DCF valuation here. Most have BUY calls on GDC.

Technical indicators are showing that GDC could be flat moving forward in the short-term, but could be poised for a breakout.

The bollinger band has been narrowing for the past couple of months, indicating further flat trading for the stock. However, it could be poised for a widening down the line if there is any significant news coming out for GDC. The RSI for now at 54 points still indicates that there is room for buying as the last RSI peak was above the 60 level 3 months back. However, the MACD indicates that this might be a good time to go for a long position as the MACD line has breached the signal line (red line). For now, GDC could be quite flat moving forward but could have a breakout in terms of an upward trend.