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Should Investors Bank on Gains with Green Dot?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Green Dot Corp. (NYSE: GDOT), a leading independent prepaid card provider for the underbanked, announced yesterday the launch of the first mobile-focused bank. Will this turn around the prospects of a stock that has been crushed over the last year as fears of new entrants into the prepaid card sector have hurt expectations?

GoBank is designed to be the first bank account focused on being used on a mobile device. The plan involves a consumer-friendly pricing model of no overdraft fees or penalty fees and no minimum balance requirements with access to 40,000 fee-free ATMs. Each account includes a checking account with a linked Visa debit card and a second integrated account called the “Money Vault.”

The stock jumped 4.4% on the news Tuesday, though the service is just now open to beta customers. The real question is whether a leader in prepaid cards can transition into the massive consumer banking market. On Wednesday, SunTrust downgraded the stock, sending it 8% lower. This suggests the analyst community remains pessimistic.

What Went Wrong in 2012?

The company relied heavily on prepaid cards sold at Wal-Mart (NYSE: WMT) leading to tumultuous price swings even as the business soared in 2011, but fears popped up that Wal-Mart would eventually look to diversify.

Those fears came to the forefront when Green Dot vastly cut 2H 2012 earnings estimates due to end-of-year competition at their largest vendors. The crux was an expected prepaid card addition at Wal-Mart that eventually came to fruition when the company decided to aggressively expand with the Bluebird option offered by American Express (NYSE: AXP)

The Bluebird card offers no minimum balances or overdraft fees and free access to over 22,000 ATMs. The options compare favorably to what Green Dot offers compounding the fears on the stock. Ironically though, Piper Jaffray research suggests that Bluebird is not negatively impacting Green Dot as much as expected. Possibly the unbanked  consumer sector sees an American Express offering as an offering for the wealthy without researching the options. Either way, the news appears bullish that Green Dot will maintain solid market share at Wal-Mart. 

Will Mobile-Centric Banking Win?

One of the biggest expenses in the banking industry is the costly branch network. Those networks are used to facilitate the acquisition of customers that typically desire a local branch for convenience.

The investor concern is that internet-only banking has been tried in the past. Will mobile and smartphones provide any advantages unavailable in the past? Will reduced fees encourage consumers to flock away from the big banks, even though low-fee bank options are available to most people?

While the company appears to have some neat technology, the ability to innovate from this point will determine whether the stock wins. Being able to peek at the account balance without logging in might be a neat feature, but ultimately the better pricing due to lower costs might be the major benefit. The company purchased Loopt in 2011 for mobile location based technology that might speed that innovation.

Stock Performance

The stock performance over the last two years has been absolutely horrendous. The 52-week high of $32.49 and all-time high of $65 are distant memories to investors that haven’t seen the stock above $15 since the end of July. The stock has bounced from the $10 to $14 range several times in the last few months suggesting the bottom might have been reached.

Historical Chart – Green Dot

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With the large drop on Wednesday, investors have the opportunity to purchase the stock at a reasonable valuation without the hype from the mobile bank launch. The prepaid card business is likely to perform better than the market expects, but investors need to be careful piling into the stock based on the mobile banking business that is only signing up beta customers at this point.

With over $5 in net cash per share on the balance sheet, Green Dot is one of the best-capitalized growth stories around. If the company can make the mobile bank into a market hit, investors could see years of strong stock returns ahead. Potential investors might want to sign up as beta customers in order to obtain insight into the product. A happy customer might be the surest sign of future stock success.

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends American Express and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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