Article written by Singh

NetSpend Skyrockets After IPO

Who would have thought that a prepaid card manufacturer could reach a $1.2 billion valuation?

IPO Details

On October 19th, NetSpend Holdings (NASDAQ: NTSP), a marketer and distributor of prepaid debit cards, was able to complete a
successful $204 million initial public offering, rising over 18% in its first day of trading. The IPO was one of the most successful
of the summer. Shares of NetSpend jumped to almost $14 on October 20 th from their initial $11 IPO price. The IPO proceeds
were used by Oak Investment Partners to cut the investment firm’s stake in the company from 47% to 39%.

The company sold 18.5 million shares on the 19 th, after pushing back the date of its debut due to the investigation of its
customer Metabank by the U.S. Office of Thrift Supervision. Competitor Green Dot Corp., the largest provider of prepaid debit
cards has rallied 35% since July. On the other hand, Meta Financial has fallen 60% since it was forced to shut down one of its
credit card programs.

Valuation

According to Rolfe Winkler of the Wall Street Journal, investors were paying $550+ apiece for each share of NetSpend
purchased through its IPO. Netspend has an enterprise value (BEV) of about $1.2 billion, which implies a $590 valuation on its
cards, whereas competitor Green Dot is valued at $630+ per card. One reason for the high valuation may lie in the fact that
pre-IPO investors cannot sell their stakes until April 2011.

Risks

The risk in investing in NetSpend lies in the fact that the company’s processing fees per card provide only $11 in revenue per
month. Marketing and distribution expenses are fairly high as well, and customers also only use cards for 1 year before
cancelling. Churn is a significant issue for the company. This is why the company’s EBIT or operating margin is only about 15%.
Due to the emergence to competitors and market saturation, NetSpend’s growth has decelerated from 50% in 2006 to 20% in
2009.

Business Model

Since 2005, there have been a number of prepaid card providers that have emerged and have been targeting low income
consumers underserved by banks. NetSpend has about two million active cards and is the second largest player in the United
States with 40% market share. It attracts customers by promising no overdraft fees and minimum balances. As more banks
turn away from low income customers, there may be potential for continued growth in this market. The company claims that
$7.6 billion in transactions were made using its cards in 2009.

NetSpend cards are sold at 39,000 retail store locations and are used by 800 corporate employers who use NetSpend cards to
pay employees without bank accounts. The cards are also FDIC-insured and are Visa & Mastercard branded.

Market

Approximately 25% of households in the United States are underbanked, and are searching for alternatives to traditional bank
accounts. The industry has growth at a CAGR of 49% from 2005 to 2009 and has reached a market size of approximately $300
million. The business is also scalable, with industry average EBITDA margins at 25%.

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