Here's Why Xoom Jumped More Than 10% After Earnings

Xoom is a technology-focused payment provider that is seeing an acceleration in its core business. Is this sustainable?

Apr 28, 2014 at 11:00AM

Xoom (NASDAQ:XOOM) is up more than 10% after reporting revenue growth of 48% and EPS of $0.06. This is $0.10 better than the consensus loss of $0.04. Clearly, this blows away expectations, but we need to look at what is behind the upside to see if future surprises are in the cards. Competition is heating up with Wal-Mart (NYSE:WMT) beginning to offer its own solution and Facebook (NASDAQ:FB) announcing that it will be entering the industry. However, Xoom's business is insulated from the competition.

Competitive advantage is ease of use, cost advantage is icing on the cake
To understand Xoom's competitive advantage, first take a step back and look at the industry. Traditional vendors like Western Union and Moneygram accept cash and initiate an electronic transfer that takes several days to process. The transaction is time-consuming and the labor involved justifies a high price for the transfer. Xoom, on the other hand, only focuses on a subset of this market. It only works with people who have existing bank accounts, which lowers the cost of the transaction. Rather than pad margins, Xoom passes this savings on to customers. This helped Xoom build up a customer base of 1.1 million people who placed a transaction in the last year (more on this later).

The key driver of upside in the quarter was revenue growth 
As the number of transactions grew from 2.7 million to 2.9 million, revenue grew by 48% year-over-year and by $4 million in just one quarter. Besides the number of transactions increasing, volatility in the Rupee allowed the company to capture a wider spread as money was shifted overseas. Since management can't predict currency movements, guidance only includes the transaction business, so currency volatility is actually a benefit.

Reduced fraud helped as well
But, revenue growth isn't the only reason for upside in the quarter. Because Xoom links directly to bank accounts, it is in a position to know how much money a person has. Using this knowledge, rather than physically transferring the funds, it advances money to the recipient at the same time the transfer is initiated. Since Xoom knows there is money in the account, it can keep fraud rates to a minimum, collecting the money it lent a day later when the ACH transfer goes through. This was one of the reasons Xoom beat estimates, the fraud rate dropped to 0.17% from 0.25%. This number will be volatile over time, but remains at the top of the industry.

Competition will drive new functionality
Xoom has built a substantial customer base, but as Facebook and Wal-Mart enter the industry, it needs to tighten the relationship and offer features the other guys do not. Wal-Mart will rely on its domestic physical presence and its balance sheet to transfer money from store to store within the United States. Facebook, on the other hand, is clearly intending to become a force in emerging market financial transfers. Facebook is starting out in Ireland, which will give it access to the EU, but emerging markets are a focus and will follow along shortly. Since India has 70 million Facebook users, it will likely follow along shortly, putting substantial competition into Xoom's backyard.

The key for Xoom is to differentiate itself from other services. Ease of use should continue to be a differentiator when competing with Wal-Mart, but Facebook has the ability to build funds transfer into its smartphone app. To compete effectively against Facebook, Xoom will need to build functionality into its app that goes beyond the scope of Facebook's business plan. The company is doing that now by adding a feature similar to Bill Pay, thanks to its acquisition of BlueKite.

Explosive earnings not likely near term
Xoom is seeing an acceleration in its traditional payments transfer business, but to insulate itself from the competition, it needs to provide functionality that is unique. Xoom has already innovated on two fronts, meaning it is possible to do again, but this means additional investment. So, it's unlikely you will see an earnings explosion in the near future.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

 

David Eller has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers