I have a question for you: would you want to invest in the following company:
- Fintech company revolutionizing the banking space (customers include Apple, Stash, Uber, and many others)
- Recurring revenue model
- Growing the topline (sales) at roughly 15% compounded over the last 5 years.
- Growing the bottom line (profit) at an even higher rate of 25% compounded over the last 5 years.
I bet you’d guess this company was trading and pretty lofty valuation and was on everyone’s radar. But you’d be wrong. I’m talking about a company called Green Dot (GDOT) and I bet you’ve never heard of it.
One of the things I do whenever I make an investment is write a short blurb about my investment thesis. The idea is that I can come back to this document periodically to ensure that my thesis remains true, despite fluctuations in the price of the stock. This is that thesis regarding Green Dot.
I’ve had the company on my watch list for quite some time, but only recently made the investment. That’s because the stock is down 70% from its November high. And that’s despite the fact that the underlying business is doing incredibly well. The reason for the drop is because they recently lowered profit and EPS guidance for the full year. But that, in and of itself is not important. The question is ‘WHY did they lower guidance?’ They lowered guidance because they are making substantial investments in the business. They’ve set aside an additional $60 million to double down on the fastest growing segment of the business, namely the platform side of the business where the company enjoys a recurring revenue model. More on that in a moment.
So why do I like Green Dot so much?
They started the business over 20 years ago as a prepaid debit card business (now they are the world’s largest company in this space). You know those prepaid cards you can buy in a Walmart or CVS? Those are powered by Green Dot. But that’s not that interesting.
What is interesting is their “bank as a service” platform. This allows other companies to offer banking products, without becoming a bank themselves. Have you heard of Uber Cash? You can deposit money into Uber Cash, which basically acts as a bank account within your Uber app. So when you request a ride or order a meal via Uber Eats, you can pay with Uber Cash and receive discounts and other benefits. Or perhaps you’ve heard of Apple Pay Cash. That’s Apple’s answer to Venmo. People can send money to one another via Apple Cash, or you can pay with Apple Cash when you use Apple Pay in stores. Both are powered by Green Dot.
This second side of the business is what you call a “platform business.” That means that other companies can build products and services on top of the platform. Apple and Uber can offer banking services, without getting a bank charter or dealing with all of the other headaches involved in financial services. The reason I love platform businesses is because you don’t have to pick winners. I don’t know who will win the digital banking business, and I really don’t care. But I do feel rather confident that many more companies will move to offer digital banking services over the coming years. And I feel comfortable investing in the company building the underlying tools and infrastructure to power those services.
And platform businesses often come with recurring revenue, which is the best kind of revenue. When merchants build web stores on top of Shopify (you know how much I love SHOP), they pay Shopify a recurring fee and it becomes increasingly difficult to replace Shopify over time. Same goes for Wordpress and Amazon Web Services. It’s really difficult to change the plumbing and foundation after you’ve built the house.
Another thing I love about the business in that they are making investments in areas where they are uniquely positioned to succeed. All of those prepaid debit cards and bank accounts means they have a ton of data about how people save and spend. As such, they are in the perfect position to role out a savings account with a 3% yield. And not only does this account have a 3% yield, it also comes with a debit card that gives you 3% cashback. You heard that right. a DEBIT CARD that offers cashback rewards. We’ve all heard about credit cards with cashback, but never a debit card. That’s 🍌🍌🍌!! It might even seem insane to some. But Green Dot might be the only company where this actually makes a ton of sense. Their unique history allows them to make unique investments and offer products that no one else can.
Finally, I love the underlying economics of the business. So many “growth” companies are allergic to profits. But not Green Dot. They are profitable and have been for a long time. And that’s not at the expense of reinvesting in the business. They continue to innovate and reinvest, but do so in a financially responsible manner. So refreshing!