Green Dot Gains on Growth Plans

By Nate Matherson of Circa Alpha

NEW YORK (TheStreet) -- Shares of Green Dot (GDOT) ended trading Wednesday up nearly 16% at $23.28 after the company reported second-quarter earnings Tuesday.

For those of you who may not yet be familiar with the Green Dot brand, the company provides financial services and money management solutions to a large base of consumers.

Through its 60,000 retail store locations and Web site, Green Dot provides consumers convenient banking products and services that up until this point may not have been available to them. With all the technological advancement and expansions within the financial services industry, one may believe the number of underbanked or unbanked consumers is fairly low.

However, this number is far higher than many believe and offers great potential to companies like Green Dot looking to help solve this problem. In this article, I would like to review the company's recent quarterly performance and future growth potential in an effort to show you why I believe shareholders stand to do well over the longer term.

Second-Quarter Review

Green Dot reported a strong second quarter where the company beat analyst estimates on both the top and bottom lines. Revenue during the quarter rose 4.33% on a year over year basis to $142.6 million, beating analysts expectations of $135.53 million. On the bottom line the company posted an adjusted earnings per share of 33 cents, beating analyst estimates by 4 cents per share. The strong results were driven by strength throughout the company's revenues streams including purchase volume, gross dollar volume, and transfer volumes.

Let's break down some of the key metrics the Street was watching going into the quarter.

Purchase volume increased by $305 million to $3.2 billion, an increase of 10% over the second quarter of last year. Gross dollar volume came in at $4.4 billion, up by $445 million, or 11%. Cash transfers rose by 1.18 million, or 12%, to 11.32 million. While active card data may have come in flat, the company announced it's planning to increase the number of distribution points by 20,000 in the months ahead.

Green Dot is looking to become more accessible to consumers by partnering with distribution outlets including Home Depot (HD), Kroger (KR), Save-a-Lot retail stores, Dollar General (DG) and Dollar Tree (DLTR). Up to this point the company has largely been dependent on Wal-Mart (WMT) for its business.

As of the most recent quarter, 65% of the company's revenue and all of its revenue growth, can be attributed to Walmart sales. By diversifying its distribution points the company is not only increasing brand awareness, but reducing the risks associated with its dependence on Walmart.

Underbanked Potential

Earlier this month Green Dot introduced a mobile banking application designed to help its customers and the underbanked community gain access to portable financial services. The product, GoBank, was released to the general public over the Fourth of July holiday weekend to strong demand and high praise. The application is currently a featured app in the Apple (AAPL) App Store in the Finance section under New and Noteworthy. The company plans to market its new service through a variety of key channels including social media, education, and most importantly in opinion, cell phone carriers.

Let us first take a look at the educational perspective. Green Dot has developed a strategy in which it will market the GoBank service to Barnes & Noble (BKS) College bookstores. Through this partnership the company will gain access to more than 5 million potential customers at 555 university campuses.

Why is this important? College students may not yet have the financial background needed to responsibly manage their accounts amid the array of other distractions. The GoBank account can easily be downloaded to a mobile device while giving students many of the benefits of having a standard bank account. By using the GoBank application, students can avoid overdraft, ATM, minimum balance and the bulk of other fees. It's too soon to tell how successful the launch will be, although we should have more data after the start of the fall semester.

The next major channel for the company, and perhaps the most important in my opinion, are the mobile carriers. In a report issued by the Federal Reserve earlier this year, the mobile financial services industry was reviewed. The report concluded that as the number smartphones increases and their capabilities expand, users will increasingly take advantage of mobile financial services.

When you consider the FDIC estimated 62 million Americans who are underbanked, 20% of our population, you can see the potential within banking industry.

The Federal Reserve report found that 52% of mobile phones are smartphones; moreover, 90% of the underbanked population has access to a mobile phone of which 56% of these phones are smartphones and have the capabilities to take advantage of mobile applications.

Green Dot has partnered with US Cellular in what I believe is an attempt to sign these underbanked citizens who have access to a smartphone. US Cellular will promote GoBank across its Android device portfolio to its five million customers. The customers will be able to easily make cash deposits at the company's distribution points including 7-Elevens.

As mobile payment technology expands, I could eventually see a day where Green Dot can scrap the conventional card altogether, instead allowing their customers to bank and transact directly from their mobile devises. Should the company find success here at home, it has the ability to greatly expand on a global level. There are 3 billion underbanked potential customers across the globe whom may have access to smartphone technology, yet no safe financial infrastructure.

Project Outreach

While Green Dot products are in a number of prominent distribution points, these retailers generally do not have a high concentration of locations in the inner city. The company announced it will now be extending its products to inner-city markets through a strategy called Project Outreach. On the conference call management discussed the plan in detail.

Green Dot and Green Dot Bank aim to become a leading provider of prepaid cards and other types of bank accounts through the nation's best and largest check-cashing centers. Through the partnerships Green Dot products will be available in the following New York metro area financial service centers: RiteCheck, David's Check Cashing and Pay-O-Matic.

These financial centers represent roughly 50% of New York's check cashing market, which management believes is the number one market in the United States. It is too soon to tell how well the brand will be received within the inner city, yet management believes its brand reputation should help capture market share.

Conclusion

Shares of Green Dot finished higher as a result of a strong quarter, promising partnerships and growth potential ahead. In my opinion, the move is warranted.

I would considering using broad market weakness as an opportunity to start a position in Green Dot. The company stands to benefit from the underbanked population in combination with an increasing number of distribution points.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Nate Matherson is currently a student at the University of Delaware, where he is pursing degrees in Finance and Economics. Nate manages his own investment portfolios in addition to writing investment analysis articles for a variety of news outlets. In the future, Nate would love to work in either the portfolio management or investment banking industry.

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