Kermit is not the only LA-based green creature that feels misunderstood.  Just over a week ago, Green Dot Corporation (GDOT) lost over 60% of its value on the news that things weren’t as rosy as expected.  This leader of the next generation of companies serving the unbanked and underbanked appears plagued by a number of colorful hairy villains including dimmer growth prospects, greater competition, and tighter regulation.  How bad is it, really, bein’ Green Dot?  Certainly not 61% worse than before (read, great time to buy), I believe.

So earnings were 1.5% below projections and 2012 expectations diminished meaningfully from jubilant prior earning calls.  Bummer.  2013 will likely look like what 2012 should have. Not great. Big players – notably American Express and JP Morgan Chase – are getting serious about general purpose prepaid. Great, not good for Green Dot, but not nearly as bad as people seem to think. Many of the 50,000+ retail locations that offer Green Dot are not bound to exclusivity. For good or bad reasons, most people seemed to think this was the case.  A couple ambulance chasers are trying to sue the company over this.  Tighter know your customer requirements forced Green Dot to turn down more card applicants. Welcome to being a regulated bank holding company, folks. 

I believe the overwhelming issues that made Green Dot so unpopular aren’t likely to be its real Achilles heel.  Yes, American Express and JP Morgan Chase are big players and recent entrees into prepaid.  Amex did offer its card against Green Dots in retail.  First, the Amex card is even skinnier in options than Green Dot.  Second, while Amex enjoys an aspirational je ne sais quoits, it is also accepted at FAR fewer places, especially those relevant to the underbanked..  As for Chase, I’m not aware their well-named Liquid card is available at retail – only online or at Chase bank branches.  I don’t think they’re going to.  The Liquid card serves to give Chase an “account” for low-balance people that it can’t make money on in their normal checking accounts.

I believe the Chase Liquid card – and others not acquired off a J-hook in a retail store – will be more successful in the long run.  You see, getting a card at a retail location just doesn’t lend itself to a l0ng-term relationship.  Indeed, many – if not most – cards purchased at retail are  loaded once, used and tossed.  Their use pattern is closer to that of a gift card than a bank account. Part of it, I believe, is the mindset of the card holder.  Part of it is the context: since payroll direct deposit is the single biggest predictor of long-term utilization, getting this done from  the check-out line is much harder than from online or your employer, or even your tax-prep site.

So, Green Dot has real pressures to contend with. But in my opinion their real challenge is inherent to their primary distribution channel.   That said, Green Dot has almost $200 million in cash and short-term investments, but is valued at only $350 million.  Their revenues are on a run rate of $540 million and net income $48 million.  All in, while it’s clearly not easy bein’ Green, I think it’s a great buy right now.

NB: I don’t own any shares of GDOT as of this writing; nor does my venture fund, Core Innovation Capital.