So far, prepaid debit card provider Green Dot (Nasdaq:GDOT) has followed a pretty familiar pattern - a successful IPO, some initial strength as big investment banks roll out coverage, and then a skidding share price as IPO buyers cash out and actual financial performance fails to match the lofty expectations of the IPO honeymoon. Even though Green Dot has disappointed some investors and there is still some regulatory risk, the stock seems to have skidded past a point where the fundamentals would support.

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Q2 Good, but Not Good Enough
On just a casual first look, it might be hard to see why these shares have dropped to a 52-week low. Revenue rose 29% in the second quarter on a 23% increase in new activations and a 27% increase in active cards. Unfortunately, good as that was, it was below the consensus estimate for the second time in a row, and also represents ongoing deceleration in growth.

Profitability too was challenged. The accounting at Green Dot is not exactly crystal clear (due in part to rules about how the company's relationship with Wal-Mart (NYSE:WMT) and other retailers impacts some line items), and operating income growth of 13% (as reported) doesn't look so impressive. This is a case where there is a reasonable argument to be made for non-GAAP adjustments, and adjusted operating income was up a more acceptable 23% (and EBTIDA rose 26%).

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Wal-Mart Both Boon and Bane
A fair bit of Green Dot's margin erosion can be tied to a commission rest with Wal-Mart. As the country's largest retailer is responsible for more than half of Green Dot's revenue, there is an undeniable push-pull to this relationship. Certainly Green Dot benefits from a privileged position with the largest retailer (and arguably the largest retailer catering to their target audience), but Wal-Mart is aware of this too and uses it to push for better terms when it can.

Green Dot is somewhat diversified in its partner base - there are plenty of places where customers can buy these cards, including Walgreen (NYSE:WAG), Kroger (NYSE:KRO) and Pantry (Nasdaq:PTRY) locations - but Wal-Mart still calls the tune. What happens if other retail partners decide to take a lesson from Wal-Mart and push the same sort of terms on Green Dot? Losing one or two partners would not be a catastrophe (or even necessarily an inconvenience), but the risk is that retail partners push around Green Dot for better terms and/or play other rivals like Western Union (NYSE:WU), Netspend (Nasdaq:NTSP), The Bancorp (Nasdaq:TBBK) and AccountNow off of each other for better terms.


Regulations Seem Benign ... For Now
Looking at the new rules for interchange fees and Green Dot management's comments on the matter, it looks like the company will be largely exempt from new rules regarding interchange fees and FinCen regulations. There will be probably have to be some minor tweaks here and there, but nothing too radical or costly.

Longer term, though, this may not be the case. Self-appointed defenders of the downtrodden are always looking to "protect" those who are under-banked and they frequently target companies like Green Dot and the fees they charge for their services. In their zeal to talk about how much the industry likes to "over-charge" their customers, there is little consideration of the fact that these are not ordinary Visa (NYSE:V) or MasterCard (NYSE:MA) cards, and the people using them often have few alternatives. So even though Green Dot is offering a necessary and demanded product, and there are enough competitors to suggest that nobody gets to just set a price, this is an ongoing risk to monitor.

The Bottom Line
These are good times to be in the stocks of companies like pawn shops, alternative lenders, debt collectors, and so on. Even absent these tough economic times, there has always been a segment of the population that is either ineligible or uncomfortable dealing with traditional banks and financial service companies and is willing to pay the higher fees for these services.

It doesn't take much effort to come up with scenarios that make this stock look too cheap. Sure, there is competition and the company's reliance on Wal-Mart puts future margins at risk, but this company seems to offer a product that people like. While there are plenty of banks out there that look too cheap, this is one bank alternative that investors should also consider. (For additional reading, take a look at Analyzing Operating Margins.)

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