There are some negatives to Green Dot's business model. Here are a few things that were pointed out to me last week:
-Barriers to entry are pretty low. Walmart has already lowered fees from $9 to $5 for a new card and from $5 to $3 for monthly maintenance. NetSpend, AccountNow, Russell Simmons' RushCard are all in this business and more competitors appear to be sprouting up. Blackhawk Networks (owned by Safeway) just announced they are entering this business.
-50% quarterly churn rate. That means every 6 months Green Dot has to find an entirely new customer base to replace the one that left. My guess is the rate is high because of the monthly fees.
-A lot of people will be wowed by the company's massive growth rate (722k stores in 2006, 3.1M stores in 2009). But it is all almost entirely due to Walmart adopting their product. I am not sure if depending on Walmart for your future success is entirely beneficial, they have a reputation for bringing costs to the bare minimum. The variable costs for issuing a new card are so low that I think this is a major possibility.
-Then there is the outrageous valuation. 46x earnings, 25x book value. This is a pretty pricy company and I think competitors are going to pounce on their space, bringing down margins and customer activations. A 10% drop in pricing with a 30% drop in customer activations makes the company barely profitable.
In Jan 2011 the lock up on insider sales goes away. I expect during that time we'll see a ton of selling.
Also if you want to learn about this industry here are some great resources:
paybefore (magazine)
www.cfsi.org (Center for Financial Services Innovation)
-Barriers to entry are pretty low. Walmart has already lowered fees from $9 to $5 for a new card and from $5 to $3 for monthly maintenance. NetSpend, AccountNow, Russell Simmons' RushCard are all in this business and more competitors appear to be sprouting up. Blackhawk Networks (owned by Safeway) just announced they are entering this business.
-50% quarterly churn rate. That means every 6 months Green Dot has to find an entirely new customer base to replace the one that left. My guess is the rate is high because of the monthly fees.
-A lot of people will be wowed by the company's massive growth rate (722k stores in 2006, 3.1M stores in 2009). But it is all almost entirely due to Walmart adopting their product. I am not sure if depending on Walmart for your future success is entirely beneficial, they have a reputation for bringing costs to the bare minimum. The variable costs for issuing a new card are so low that I think this is a major possibility.
-Then there is the outrageous valuation. 46x earnings, 25x book value. This is a pretty pricy company and I think competitors are going to pounce on their space, bringing down margins and customer activations. A 10% drop in pricing with a 30% drop in customer activations makes the company barely profitable.
In Jan 2011 the lock up on insider sales goes away. I expect during that time we'll see a ton of selling.
Also if you want to learn about this industry here are some great resources:
paybefore (magazine)
www.cfsi.org (Center for Financial Services Innovation)