Green Dot Corporation (GDOT), American Express Company (AXP): How Can This Card Company Compete?

Should American Express Company (NYSE:AXP) go after market share while promoting its lower fees for direct deposit customers, Green Dot investors will feel the pinch. Members who receive payroll on their Green Dot cards are the company’s single source of growth.

Valuing prepaid cards

Competition is the best friend of the consumer, but the bitter enemy of the investor. Competitive markets destroy profitability, transferring benefit to the consumer, not the shareholder.

As a pure-play on prepaid cards, Green Dot is still attractive. The company trades at an equity value less net cash of $470 million, which prices it right at 10 times free cash flow. A free cash flow yield of 10% is still tempting for a levered investor.

Cheap stocks are often cheap for a reason. Green Dot faces one of the most difficult environments in business: competing with a larger company that can afford to lose money on a relatively microscopic subsidiary to steal your market share.

Green Dot’s historical free cash flow generation is impressive, but that was when the company had a monopoly on Wal-Mart Stores, Inc. (NYSE:WMT)’s distribution. Now it has to compete with the likes of a cheaper, fee-friendly American Express Company (NYSE:AXP) Bluebird.

The best opportunity for investors could be a buyout. Green Dot’s network and intangible brand has real value, but it needs to be monetized through a bolt-on acquisition before other players step up to the plate to create their own solutions. With many 13G filings on the stock and not a single 13D, it doesn’t look like there’s much pressure from the inside to seek an acquirer.

Without an activist on board and Green Dot’s executives touting their own M&A plans, it looks like Green Dot has every intention to compete ruthlessly for customers. That may be a money-losing strategy, given the competition is well-capitalized and capable of running losses to acquire market share.

The article How Can This Card Company Compete? originally appeared on Fool.com and is written by Jordan Wathen.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends American Express. Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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