The United States has thousands of banks, yet the number of people who can't or won't use them exceeds the population of Canada. Instead, these consumers turn to cheque cashers, payday lenders and other “alternative” providers of financial services.
Among the not-quite-banks are firms that offer “general-purpose reloadable” payment cards, which substitute for traditional credit cards.
Green Dot Financial Corp. and Netspend Holdings Inc., the two top practitioners of the GPR card, are among the fastest-growing non-traditional financial companies. Two years ago, their shares were priced to reflect that growth, but they have been sliding since. The final crack in the growth story came last week, as sharply reduced guidance from Green Dot sent its shares down 60 per cent in a day; the stock is now more than 80 per cent below its peak levels.
Netspend, which is down a mere 45 per cent from its late-2010 high, releases earnings after the market closes Thursday. Its numbers will help to show whether the whole industry is troubled – and whether either or both stocks are worth a gamble.
GPR cards are reloadable gift cards, branded with Visa or MasterCard logos, that can be used at multiple merchants. The cards cost several dollars to purchase and, depending on which company produced them, typically have some combination of monthly maintenance fees, “reload” fees and overdraft charges. For people who don’t have a bank account or can’t pass a credit check, they fill a need.
In early 2011, when an earlier Green Dot earnings miss was causing it and Netspend to drop from their previous highs, the general sentiment was that the industry was in its infancy. Green Dot argued that its target market was huge, spanning roughly 50 million people in the U.S. without a bank account, plus 100 million more with a household income of $75,000 or less.
Green Dot’s path to such widespread use now seems seriously off-track, as its revenue growth is decelerating, not accelerating. The Los Angeles-based company posted year-over-year gains of nearly 40 per cent in 2010; its newly revised guidance for 2012 implies 10-per-cent to 12-per-cent growth.
Green Dot blames rising competition – it has lost exclusivity at some of its retail partners – as well as tighter fraud controls, which will cut 5 per cent to 10 per cent from its card portfolio growth. The company reduced its earnings per share guidance by 22 per cent.
“Unfortunately, we were under the impression that Green Dot would compete effectively and had its operational costs under control to adjust to the changing prepaid environment, but we were wrong,” Bryan Keane of Deutsche Bank says in a recent report. “It has become clear that prepaid industry growth alone will not sustain Green Dot’s previous growth rates.”
Investors have punished Green Dot so deeply that its shares are trading at a multiple of just under nine times forward earnings. Since Green Dot has cash and short-term investments worth roughly $5 per share, Green Dot’s current price of $10 gives little value to a business that was valued at more than $60 a share less than two years ago. (After last week’s disaster, analysts rushed to cut target prices on Green Dot, but generally settled on numbers around $18 or $19, nearly twice current levels.)
Investors who embrace risk may find that to be a great opportunity. But the better value, some analysts suggest, may be Netspend. The Austin, Tex.-based firm saw its share price shrivel more than 22 per cent following Green Dot’s woes last week. The current forward P/E of 15 is half peak levels.
“We think investors need to differentiate between NetSpend and Green Dot,” say Sterne Agee analysts Greg Smith and Jennifer Dugan. NetSpend built its business primarily through direct-marketing channels and by selling cards to employers who would use use them instead of payroll cheques. But now, say the Sterne Agee analysts, Netspend is gaining share in the retailer market at the expense of Green Dot. “NetSpend historically has not had a strong retail presence so this new business is incremental for them, even if their cards are being sold alongside other competitors.”
The glory days of high-growth expectations for GPR cards are now past, it seems. However, few argue that the concept is dying. The new, lower bar for both these companies means strong-stomached investors may want to give a green light to Green Dot, or spend a little on Netspend.