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. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  6. Stock Analysis

    The Top 5 Financial Penny Stocks for 2016 (CPSS, ASRV)

    Learn about some of the most promising penny stocks in the financial services sector that investors can consider adding to their portfolio for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center