Green Dot Rides Walmart to an IPO


About a 11 years ago, at a Starbucks (SBUX) coffee shop, I met an aspiring entrepreneur, Steven Streit. Like many at that time, he wanted to leave the corporate world and become a dot-com millionaire.

His startup idea was intriguing: to build a new industry for prepaid debit cards. However, he had no experience in the financial services industry and his business plan was fairly vague.

But he had some things that were crucial: boundless energy, passion and tenacity. He eventually started his business, which eventually became Green Dot, from his bedroom.

And yes, he eventually realized his vision. Green Dot (GDOT) launched its IPO today, issuing 4.56 million shares at $36 apiece. The initial plan was for 3.85 million shares at a range of $32 to $35.

In Thursday's trading, Green Dot's shares rose 22%.

The Platform

When Streit formulated his business plan, he understood that there was an enormous opportunity to leverage emerging technologies to capitalize on the under-banked or never-banked segments. That market is currently 160 million in the US.

Of course, building the company required lots of hard work. First, Streit had to build a sophisticated payments system that could enable real-time transactions through major networks like Visa (V) and MasterCard (MA). This would also require compliance with a variety of financial regulations as well as customer service processing systems.

Next, Streit needed to find a way to reach his potential customers. But traditional methods were ineffective, such as with direct mail and bank branches. So why not distribute Green Dot cards in retail stores?

It was a brilliant idea. And over the years, Streit built a network of over 50,000 locations with partners like Wal-Mart (WMT), Kmart, Walgreens (WAG) and CVS (CVS).

But this was still not enough. Basically, Streit had to find ways to get potential customers to understand and adopt the Green Dot card. So, he came up with the idea of productizing his concept, making the packing look like any consumer product on the shelf. The product was called a MoneyPak.

The Big Idea Turns to Gold

From 2007 to 2009, revenues have zoomed from $83.6 million to $234.8 million. Already in Q1, revenues hit $92.8 million and net income came to $24.1 million. There are roughly 3.4 million active cards.

Not resting on its laurels, Green Dot has continued to innovate. Some of the recent programs include a deal with PayPal and online bill payment.

Yet, Green Dot is not without its risks. Wal-Mart accounts for a whopping 63% of overall revenues. And the retail giant renegotiated its deal with Green Dot to increase the commission levels (they were lowered in 2008 so as to transition to a new system), which will cut into profits. There has even been a reduction in card fees to remain competitive.

What's more, Green Dot's revenues are likely to be lumpy because of the boost from the tax season. Bear in mind that the company has a key deal with TurboTax.

Besides, as seen with other hot IPOs like Tesla (TSLA), volatility can be substantial. So for investors, it's probably a good idea to hold off on Green Dot for now -- at least until the next earnings report -- to allow the stock to get seasoned in the market.