I'm not exactly sure why, but specialty finance seems to have more than its share of flash-in-the-pan growth stocks that come out of nowhere, post a couple of years of great growth, and then all but disappear from the scene. The risk of a repeat performance seems to weigh on the shares of Green Dot (NYSE:GDOT), as many analysts project robust revenue and free cash flow growth, but seem to take a "no, you first" mentality to the stock.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Q1 Numbers Okay, But Deceleration Is a Worry
On the whole, Green Dot's first quarter numbers looked reasonably good. Reported revenue grew 18%, as cash transfer revenue rose 27% and both card revenue and interchange revenue rose by about 15%.

Many of Green Dot's numbers have to be looked at through the lens of "ex-TurboTax" as the company no longer had Intuit (Nasdaq:INTU) as a partner. So then revenue actually grew about 27%, and active cards increased by about 20% and not the 10% reported, while new card activations were actually up 23% and not 1% and gross dollar volume (GDV) increased 33% and not 5%.

Profitability was OK, but leverage seemed to be lacking. Adjusted operating income rose about 19%, while the operating margin expanded just 10 basis points.

Growth deceleration is a hot topic with Green Dot, and for good reason. Although ex-TurboTax revenue growth was actually a bit higher than in the fourth quarter (27% versus 26%), metrics like active cards, GDV, new activations and cash transfers continue to show sequential deceleration in growth, while margins have stayed relatively flat.

SEE: Understanding The Income Statement

Walmart Still a Huge Factor
Walmart (NYSE:WMT) continues to have a disproportionate influence on Green Dot's business. Walmart is Green Dot's largest distribution partner and represented 64% of first quarter revenue - up from 58% in the fourth quarter.

This is an ongoing good news/bad news situation. Part of the bad news is that a commission reset is approaching (May 2013), and Walmart will almost surely want a bigger cut (when's the last time anybody said Walmart was generous?). Moreover, American Express (NYSE:AXP) is trialing its own prepaid card with Walmart (Bluebird) and that may give Walmart leverage to push a harder bargain, even if the Bluebird card is more limited than Green Dot's offerings.

SEE: Earning Forecasts: A Primer

Will Mobile Matter?
Green Dot acquired Loopt in large part to enhance its mobile payment efforts. Mobile payment is a big buzzy topic these days, with everyone from Visa (NYSE:V) to Verifone (NYSE:PAY) to eBay (Nasdaq:EBAY) going out of their way to highlight their involvement. Certainly it makes sense for Green Dot to be involved, as it may be a way of both attracting new customers and holding onto existing ones.

That said, there are ample question marks. Management won't say much of anything useful about their mobile plans, leaving investors with a good sense of real-time dilution (the costs), but only a vague notion of the long-term benefits. Along similar lines, management offered pretty robust guidance, but not a lot of specificity on how the company is going to get there.

The Bottom Line
It's readily apparent that the Street simply isn't buying the growth story at Green Dot. Whether that's because they don't trust the management, worry that the Walmart relationship will ultimately hurt margins, or believe that competitors like American Express and Western Union (NYSE:WU) will ultimately grab share, I do not know.

But what I do know is that sell-side projections call for a free cash flow growth trajectory in the mid teens, and that would imply a fair value in the high $40s. Reversing the equation, today's market cap suggests only 7% compound free cash flow growth over the next decade - a major divergence from current expected earnings growth rates. For investors who believe in the growth story at Green Dot, today's prices could be a great long-term opportunity, but more skeptical investors may well be thinking that this story is just a little too familiar for comfort.

SEE: 5 Must-Have Metrics For Value Investors

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Insurance

    Biggest Life Insurance Companies in the US

    Read about the top life insurance companies in the United States as measured by written premiums and learn a little more about their business operations.
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!