Green Dot (GDOT) had its IPO on Thursday, July 22 and proceeded to close 22% above its initial IPO price of $36 per share. A very strong start for the up-and-comer and the surge seems well founded; Green Dot has grown revenue at an exceptional clip. Before the IPO Green Dot’s fiscal year ended on July 31 with fiscal year 2009 revenue increasing 39% over 2008. From 2005 to 2009 revenue grew at a 5 year compound annual rate of 42.8% (unaudited numbers from SEC filing S1). The future also looks bright for this new publicly traded company.
Green Dot serves the under-banked and un-banked population of the U.S. According to the FDIC, there are about $44 million people in the broader under-banked category and $17 million in the un-banked category. With 3.4 million pre-paid debit cards issued so far, Green Dot has the potential for more years of strong growth.
Another boon to Green Dot was the recently passed Dodd-Frank Financial Reform bill. The bill, among many other things, will cap interchange fees at a “reasonable rate” on debit card use. Currently, the U.S. averages about 1.6% for interchange fees while Europe averages 0.2% and Australia averages 0.5%. 30% of Green Dot’s revenue comes from interchange fees. The Dodd-Frank bill had the potential to disrupt a very large portion of Green Dot’s business. Luckily, Green Dot is exempt from the regulation and as management stated, it shouldn’t have an effect on this portion of their revenue.
Not everything is rosy for Green Dot
63% of Green Dot’s revenue is through Wal-Mart (WMT). Green Dot’s profitability is very reliant on Wal-Mart and Wal-Mart knows this; they can extract hefty concessions from Green Dot .
In May of this year Green Dot signed a new contract with Wal-Mart. Instead of the 5-7.9% commissions rate Green Dot paid the last 4 years, Green Dot will now pay a 22% commission rate. Wal-Mart also took a 5% equity position in Green Dot through the IPO process.
The new contract with Wal-Mart will compress Green Dot’s margins. Green Dot can counteract the margin compression through the network effect built into their business model. However, to capitalize on the network effect Green Dot will need greater market penetration and a greater volume of transactions through its network. Management is expecting 25-30% growth next year and they’ll need it to fight off the increased costs of doing business.
Management and key insiders are using the IPO to sell their shares with no proceeds of the IPO going to the company.
USE OF PROCEEDS
The selling stockholders are selling all of the shares in this offering. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders. – SEC S1 Filing
This is anecdotal evidence at best but it makes an investor stop and think, “if business is so good and the future looks bright why are insiders looking to sell so much stock”? Yes, the IPO process is a way for venture capital funds to monetize their investments and for management to reap the rewards of building a successful company but it does create a pause for concern.
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