Green Dot Owners Can’t Breathe Easy (GDOT, WMT)

Despite a string of events suggesting it wasn’t likely to happen, prepaid debit card middleman Green Dot (GDOT) announced after Monday’s close that Walmart (WMT) — its biggest customer/partner — renewed its partnership with Green Dot for another five years. GDOT shareholders breathed a sigh of relief, and sent the stock up more than 30% today on the heels of the news.

GDOT, Walmart stock, WMTWhile clearly an unexpected victory, the decision from WMT and the subsequent response from GDOT shares underscores an ongoing concern that the prepaid debit card service provider is simply too reliant on one source of revenue.

Worse, this stressful discussion will surface again five years from now.

For that matter, while the partnership was renewed, this one isn’t quite as fruitful for Green Dot as the prior one was.

Translation: GDOT shareholders still have reason to be concerned.

Sweating Bullets

Those who doubted the two companies would come to any sort of an agreement weren’t unnecessarily pessimistic; Walmart had apparently been methodically weaning itself off of Green Dot for a while.

Case in point: In 2012, Walmart opted to team up with American Express (AXP) to provide the backbone for an alternative to Green Dot, featuring the new so-called Bluebird pre-paid credit cards right next to GDOT cards within WMT stores. Although Walmart didn’t outright boot Green Dot, there’s no way to deny it was a direct jab at the once-exclusive partner.

The world’s biggest retailer moved deeper into banking-like services early last year, adding a money transfer business to its in-store menu of financial services. Though it wasn’t a direct poke at Green Dot, it did stab another Walmart partner at the time — Western Union (WU) — in the back, underscoring to Green Dot that no relationship with Walmart was truly safe.

Although Walmart teamed up again with Green Dot in September of last year to bring checking to its customers, by December, the expiration of the prepaid debit card contract was in sight, and the odds of a renewal at the time were in question.

In other words, the new deal was never a sure thing until Monday, when it became a sure thing.

WMT Says Yes, But …

The new agreement (which actually went into effect at the beginning of May) is a five-year deal. It’s not as generous to Green Dot as the previous one was, however.

The revenue-sharing specifics of the new deal weren’t divulged. But some details were gleaned during Monday’s conference call explaining the new agreement. Deutsche Bank analyst Ashish Sabadra figures Walmart will be receiving 600 more basis points in revenue from the partnership’s top line than the prior arrangement offered. When asked to confirm or deny Sabadra’s assumption, Green Dot CEO Steven Streit responded with “Based on our public disclosures, that’s a fair piece of math.”

For perspective, Green Dot reportedly was paying Walmart a 22% sales commission as far back as 2010. That same contract, however, called for the commission to ramp up by 4 percentage points in mid-2013. Simple math implies that Green Dot is now handing over more than 30% of the venture’s revenue to Walmart.

Some would say those ever-tougher terms from Walmart are bordering on extortion. Owners of Walmart stock would simply say it’s good business to apply leverage that you can fruitfully apply.

Whatever the case, few would deny that Walmart has served as the foundation for Green Dot’s significant growth since 2009’s top line of $112.8 million. Green Dot did $601 million in business last year, with Walmart ultimately generating more than half of its sales.

While steep, a payout rate near 30% may still be well worth it to retain Walmart as a distributor.

Bottom Line for GDOT

While Walmart still is the heavy lifter of Green Dot’s revenue, only a third of Green Dot’s top line is specifically driven by the so-called MoneyCard prepaid debit card product. The rest is generated by other money services GDOT facilitates for Walmart, like checking services through GoBank.

All the same, while Green Dot continues to wean itself from Walmart, it’s still got a long way to go before it brings the same kind of bargaining clout to the negotiating table that Walmart does.

The good news: GDOT has five years to build up that muscle, and GDOT investors can expect five more high-growth years in the meantime.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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