Markets

Is Green Dot a Buy?

After falling 71% in 2019 amid disappointing financial results, shares of financial services firm Green Dot (NYSE: GDOT) have more than doubled so far in 2020. And it's not even because COVID-19 and the ensuing lockdown have shoved the world down the digital path. Rather, better profitability following a renewed emphasis on the banking-as-a-service platform and a C-suite shake-up backed by activist investor Starboard Value are responsible. 

Green Dot is not the extreme value it was six months ago, but this fintech outfit might have a little gas left in the tank  -- although it isn't likely to be a high-growth name like some of its peers.

A young woman holding a smart phone and credit card.

Image source: Getty Images.

Give me growth, or give me cash

Green Dot is known for its prepaid debit cards, online bank portal, and cash transfer platform. It partners with other companies that want to integrate basic banking services into their operations. Some of these notable partners are online investment app Stash, Walmart's MoneyCard, and Intuit's Turbo Tax (which offers advances on tax refunds using Green Dot debit cards).

It's not exactly the highest-growth fintech stock out there, but it isn't bad. Revenue is up 63% over the past five years. However, the company's banking products have grown increasingly complex and have lost some steam as of late, and new CEO Dan Henry has set himself the task of simplifying the company's various services. And that's what has the stock on a tear this year.

Not so long ago, free cash flow (revenue less cash operating and capital expenses) profit margin ran close to or more than 20%, but that figure dropped to just a 10% margin in 2019. Early indications are showing that things are moving in the right direction again. Free cash flow of $88.3 million in Q1 2020 was good for a 24% profit margin, and revenue growth of 6% compared to a year ago wasn't bad either. Shares have rallied in a big way on hopes Green Dot is righting the ship. 

No longer cheap at these levels

Green Dot reported a sharp slowdown in transaction volume in late March and early April due to the lockdown, but those trends rebounded quickly. Interest income is also expected to be lower for the remainder of 2020 as well, but the good news is that's a tiny fraction of total revenue. 

Thus, for this stock's run to keep going, it's all about the bottom line. It remains to be seen how COVID-19 will affect the rebound, but Henry and the new management team's focus on streamlining operations is the right move.

However, growth in profitability this year is at least partially baked in already. At the beginning of 2020, Green Dot stock traded for a lowly 11 times trailing-12-month free cash flow. Now at just over 25 times free cash flow (as of Thursday's close), shares are not the value they were just months ago. 

It isn't an unreasonable sum, though, if Green Dot can continue growing at a modest pace and increasing its cash generation rate. Plus, the balance sheet is in great shape: At the end of March, cash and equivalents were $1.56 billion, investment securities $308 million, and debt just $100 million (from the line of credit drawn down at the start of the lockdown).

For a fintech packing some real punch, I still like money-movement apps like PayPal Holdings and its Venmo subsidiary and Square's Cash App more. Both are transforming from digital payments into full-fledged modern banking and financial services firms. Green Dot is nevertheless making solid progress with its own tech-driven banking portfolio, and could be a good value stock in the fintech space -- but I don't see the same kind of growth rates as its peers in the years ahead.

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Nicholas Rossolillo and his clients own shares of PayPal Holdings, Square, and Walmart Inc. The Motley Fool owns shares of and recommends Intuit, PayPal Holdings, and Square and recommends the following options: short September 2020 $70 puts on Square and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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