The money transfer industry is changing fast and industry upstart XOOM (XOOM.DL) is helping to push the envelope. Unlike older players in the industry, it isn't saddled with legacy models. Instead, XOOM has used technology to leapfrog ahead. And that means the 20% price drop over the last six months is probably a good buying opportunity.
Computers are here to stay
The old way of sending money with a transfer service like MoneyGram involves taking cash to a physical location and handing it to a human being. The recipient of that money would similarly have to go to a physical location and accept cash from a human being.
This is why MoneyGram highlights its over 339,000 "locations." XOOM, for comparison, has zero, none, nada. And that's a huge advantage on two fronts. First, there's no cost associated with maintaining locations, because all of XOOM's transactions are handled online. Second, once a customer is set up, it's easy for him or her to keep using the service.
The big difference is that XOOM's customers use bank accounts to fund transactions and not cash. After all, money in a bank is just a blip of information. It's relatively easy to shift that blip into a different account. With a cutting edge, low-cost model XOOM increased its share of the money transfer market from less than 1% in 2010 to 7% last year. It's been focusing on expanding in key destination markets, like Mexico, South America, and India.
Taking a right hook
Being totally digital is a bigger advantage than it may seem. For example, MoneyGram's largest agent is Wal-Mart (WMT -0.15%), accounting for a little more than 25% of the company's top line last year. Only Wal-Mart just introduced its own money transfer service. That news, understandably, sent MoneyGram's shares tumbling.
Although Wal-Mart's new money transfer service is just U.S. based right now, the world's largest retailer has over 10,000 stores across the globe. If this experiment pans out, Wal-Mart will likely take a big chunk of the physical money side of this business, with MoneyGram feeling the biggest hit. XOOM, meanwhile, has little to worry about.
So why the funk?
That doesn't help explain why XOOM's shares are down 20% over the past six months. Part of the reason is that entrenched competitors aren't sitting around. MoneyGram has its own online service, too. Use of MoneyGram's online services increased 35% year over year in the first quarter. And the company continues to invest in the business.
In addition, the markets that XOOM is targeting aren't a secret. Every participant knows the industry's sweet spots and is targeting them. For example, just this year MoneyGram has expanded in the middle east, South America, and China, among others. So XOOM does, indeed, face stiff competition with better name recognition.
Results also softened as the year progressed in 2013. Although year over year performance was impressive, sending volume fell each quarter in the back half of the year. However, first quarter results picked back up again, with $1.6 billion in money transferred over XOOM's network (fourth quarter volume was just under $1.4 billion). That's a positive sign and one that supports the company's long-term growth thesis—after all, growth is never a perfect incline.
With its shares off from recent highs and a still impressive long-term growth opportunity ahead, XOOM is worth a look for aggressive investors. There's no question that entrenched industry players like MoneyGram will fight hard to keep market share, but XOOM's business model leapfrogs the competition at a time when the world is increasingly reliant on and comfortable with technology. As XOOM further builds out its network, economies of scale will kick in and top line results will increasingly flow right to the bottom line.
