A Deep Dive Into IPO Remitly

In this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a deep dive into Remitly (RELY 1.86%), a cross-border payments company that just went public. The pair discusses what Remitly does, how it makes money, its market opportunity, and much more, so check out the discussion to see if it could be a stock to put on your radar.

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This video was recorded on September 27, 2021.

Jason Moser: It's Monday, September 27th, I'm your host Jason Moser, and on this week's financial show, we're taking a look at the financial services company Remitly, a recent IPO. Joining me this week, it's Certified Financial Planner, Mr. Matt Frankel. Matt, how's everything going?

Matt Frankel: Good. This one was fun to dive into because it's a very recent IPO, it just went public, I believe on Friday.

Moser: It is a very recent IPO. I agree with you. It was fun to dig into. When I saw that they were going to go public, I'd been looking more in the Remitly over the past several weeks just because it caught my eye for one reason in particular. I'm sure longtime listeners will remember my affinity with a little company called Xoom, not that video conferencing Zoom, but X-O-O-M. The remittance company Xoom that was acquired by PayPal before it had a chance to really do its thing. This to me, Remitly, looks like Xoom 2.0 almost, so let's just dig right in here to see first and foremost what actually does Remitly do Matt?

Frankel: The company's mission is to make it easier for especially immigrants to send money back to their home countries. The general idea is that the process of sending money internationally is very complex, even for people with means, it's complex. It's inconvenient and it could be expensive. Especially if you're in a household that doesn't have a bank account. If you're in a household that doesn't have access to traditional financial services. If you don't have the ability to drive to a Western Union, whatever you want to, it can be a very clunky process. It's a big market and a lot of demand to send money home. We'll get to that and a little bit. But it's a big market that was really not being addressed well.

Moser: I think that is one of the reasons why PayPal acquired Xoom so quickly, is because they recognize it was this big market that really wasn't being served very well. The old ways of doing things like using Western Union. You've got to get in your car, you've got to go to a store, either a Western Union store or a store where Western Union is. You have to write a check or use cash. You have to fill out all these forms. You have to pay a lot of money. It's not instant funding. It takes a while. It's a clunky process and certainly, Xoom back in the day set out to make that system better. Along that timeline there, Remitly was founded with that same basic idea. I think it's very easy for folks here, just domestically in the United States to not think about that. But the fact of the matter is, this remittance industry is responsible for about $1.5 trillion in activity on an annual basis. There's money going outside from the United States to home countries all over the place every day, and like you said, it's for very important reasons.

Frankel: It lets people send money a few different ways too. You mentioned Western Union, which is pretty much, you send it to a location, someone picks it up in cash. That's definitely part of it. I looked in Mexico alone, there are 40,000 locations customers can pick up cash through Remitly, so it's a pretty big network. But in addition to that, they also facilitate bank deposits, mobile money transfers through their apps so someone could just get money on their mobile device, and home delivery in a lot of cases. In many markets they actually facilitate home delivery, someone will show up and put cash in your hand if someone sends it to you. It's really just like a much-improved process and the fees really aren't that bad.

Moser: That's got to be a nice knock on the door. I feel like you better give them a heads-up because typically when people knock at the door, unless I know who it is, much like the phone I run and hide and choose not to answer. Oftentimes it's not solicited, so to speak. Let's talk about the market opportunity here because I don't want to mislead folks when they think about $1.5 trillion, that is just a lot of money and we need to be pursuing that market opportunity. That's not really Remitly's market opportunity. That's the volume of money that's flowing in outbound remittances. But what do you see as the actual market opportunity for Remitly?

Frankel: Well, so whenever you're looking at a company like this, they quantify their market opportunity and what it actually is, are usually two different things. But having said that, so you mentioned the $1.5 trillion figure and that is an accurate figure when it comes to the remittance market. They estimate their core market to be about a third of that. They said $540 billion of remittance to send to developing countries. Now, how do they make money off that? They mentioned they take a fee. It's lower than most other methods, but this isn't a charity, they are taking a fee off of this. It varies by country, and it varies depending on how fast you want the money sent. Is it Venmo that charges for instant transfers but not for uninstant transfers?

Moser: Well, I think also Square did the same thing at least for a time they may still.

Frankel: Right, so they do a similar model to that, they have two speeds. They've express transfers, which are done in minutes, which internationally is very quick, and what they call economy transfers, which take three to five business days. Just to give you an example, I just pulled up a few random markets in Brazil, if you're trying to send money to Brazil an express transfer would be $5.99, an economy transfer would be $1.99. Jamaica, when I lived in Florida, a lot of my friends were from Jamaica, so I looked at it, $4.99 versus $3.49, so a pretty narrow gap actually to send express. A lot of great market opportunities, it's definitely a fee-generating business. That doesn't really include any adjacent products they developed over time, which they're doing, but it's definitely part of the growth plan. Let's say the current remittance market generates about $40 billion of transaction fees globally. That's based on these higher fee methods. Even if they've got 100% of the market, it wouldn't be $40 billion. They charge lower fees than everyone else. They generated $258 million in fee revenue last year and say that they have about 3% of their core market. Do some reverse engineering with that and you're looking at giving or taking about a $10 billion revenue opportunity in their core market. That's without any adjacent businesses if they end up developing along the way. Big market opportunity. Not quite as big as that $1.5 trillion figure makes it sound, but the total market size never really is accurate of something, what a company could actually achieve. But having said that, they could easily get their fee revenue in the billions in the next few years.

Moser: It really does feel like it's me. I appreciate you saying that because I do always take those internal estimates with a grain of salt. I tend to discount them just for peace of mind really more than anything. I always feel like they're obviously trying to paint the prettiest picture. Regardless, even a little bit of that big market could be very meaningful. Now, I think this is a fascinating line of work and having studied Xoom. Xoom, it was a recommendation we made in a million-dollar portfolio back in the day. It was a stock that I owned personally, it was when we had a lot of aspirations for it. Having researched that business, I felt like I understood really what could make that a good investment. I feel like a lot of those factors are still in play for a company like Remitly, I mean, it feels like it doesn't boil down to just one thing though. It's not like the lowest fee wins I don't think.

Frankel: It's not just the lowest fee wins, it's who serves the customer best. I see a comment about sending through Blockchain, and Bitcoin, and stuff like that, which is great if it's serving you well. Not everyone has a Bitcoin wallet they could immediately send money back home, especially the developing countries. It's a matter of serving customers better and that's really what Remitly aims to do. It's not just that they're trying to undercut the competition on price. Because you mentioned Zoom, there are companies that aim to disrupt the traditional fee model. It's not just cutting price, it's really offering the best service. For example, Remitly tries to make it easier to upload a document identification for immigrants which is a big pain point in the traditional process. It's things like that serve the customer better that really you need to pay attention to.

Moser: From the business perspective, one thing that always stood out to me in regard to Zoom was, this was a business that was built basically from mobile technology. This is a very mobile-oriented space. Remitly, no exception. Great mobile presence there. Obviously, we all do our banking online now so you know the convenience that's there. I think adding that convenience is crucial but also, it provides these businesses with a lot of data. What they do with that data, I think, is really important. It helps them build their risk management models. That was something that really stood out to me for Zoom back in the day. I wonder if you see the same signs with the business like Remitly because ultimately, when you're sending money overseas, there's a risk involved with that. You've got foreign currency risk, you've got loss risks. Those are always going to be part and parcel of the business, but really utilizing that data in order to make the best decisions, that helps them fund those receivers almost immediately when they can. What do you think about Remitly's perspective there in regard to risk management? Do you feel like that's a competitive advantage with a business like this or is that something that they're still working on?

Frankel: I think of some of the biggest fintech disruptors we talked about on this show. We talk about Lemonade all the time. We talk about Upstart very often. What do those have in common? They have a lot of data that they use to their advantage. Lemonade tries to use it to predict insurance pricing. Upstart uses it to predict consumer credit behavior better than traditional models. Same thing here with Remitly; the more data they get, the better they can predict like you said, exchange risk, things like that. It does give them a better competitive advantage over the legacy players that either aren't doing that or started doing that much later. Remitly went public last Friday, so it might sound like a very new company or maybe last Thursday. It might sound like a very new business, but it's really not. This was founded 10 years ago.

Moser: I think it's 10 years old.

Frankel: 10 years ago. It's been around for some time. At the time it was founded, the other players were not doing this data mining type approach to it. It was really just a straightforward foreign exchange type business. Remitly, it's a much better competitive advantage that has that level of data.

Moser: It feels like there's some switching costs involved here too. What I mean by that is if you are someone here in the United States and you rely on sending money to relatives overseas on an ongoing basis, that's usually a pretty consistent behavior. It's typically something that's done on the regular. Like we're used to with our banking accounts. You get used to using one service and unless another service really is going to outshine it, your chances are you're probably not going to switch, unless really the reason presents itself. I look at that from two different perspectives. It could be a little difficult for Remitly to gain customers who have already been using a service for a long time. But by the same token, there's a lot of incentive to get those customers in and really treat them well because that is such a sticky service over time.

Frankel: It's not hard to disrupt people who are tired of driving to Western Union. It's tough to disrupt some business that has an app that people are used to. There's a reason I just downloaded Google Chrome about three weeks ago. It's because I got so used to Firefox in college, and have been using it ever since, and I didn't want to switch. Chrome is a better browser. I can tell you that hands down. Chrome is a better browser, but I didn't want to switch because I was used to it. The same thing applies to a business like this. If they do a great job, it's going to take someone really overshooting them to steal their customers. They're doing a great job of disrupting the traditional businesses like Western Union. For example, they'll give people a preferential exchange rate on their first transfer. I don't know if anyone is doing that. They're taking a loss on the currency exchange to land the customers.

Moser: Got to get to them on the door.

Frankel: That's genius. Waive the fee. They waive fees for some high dollar transfers. If you're sending money to Mexico, for example, it's $3.99 if you're setting under $500. No fee if it's over $500. It encourages those high volume transfers. They're offering preferential exchange rates, like I said. Significantly, 1% or 2% more money, which could be a lot if you're sending a good amount of money.

Moser: No question.

Frankel: Do a good job at competing.

Moser: I think of Xoom, PayPal saw Xoom early on, and acquired it. Remitly has a relationship with another big network out there that you've probably heard of, a little company called Visa, Matt. Visa has actually invested cold hard cash into Remitly. Visa has invested money into Remitly's business and Remitly has a direct relationship with Visa. That to me, that's a sure fire sign of a company doing something right. When you have a company like Visa, which obviously is looking to evolve and remain a key part of the way money moves around the world, you're getting buy-in from Visa. I think that's a good sign. It also makes me wonder if the end game here really is that at some point, Remitly becomes part of the bigger family.

Frankel: I wouldn't be surprised. I think the big obstacle to that is valuation right now. There's almost a $7 billion market cap business right now. To acquire them realistically, you'd have to spend about $10 billion. It could happen. I could definitely see them being a takeover play at some point.

Moser: I could and I think you're right. Valuation is probably a sticking point right now. I would imagine, you've got two co-founders leading the way here. They own about 6% of the company. I'm sure they would probably like an opportunity to let this thing run for a little bit and see what they can do.

Frankel: For sure, I can definitely see that happening. I think they want to grow. Right now they're just growing so fast and I think they want to see where it's going, on the cusp of profitability too, almost 100%, 92% year-over-year revenue growth in the first half of 2021. I mentioned there are over $250 million of annual revenue they were in 2020, they'll be at much more than that this year. Their net loss was something like $9 million last year, not a ton. For a $7 billion company, losing $9 million is pretty much on the cusp of profitability. I would not be surprised for them to have a profitable 2021, to be honest with you.

Moser: That's one thing that's attracted me is the losses are far more modest than these other tech high fliers. Even though the valuation is still up there, what do you see in somewhere 20x, 22x sales, I guess. It doesn't seem as crazy as some of these other lofting multiples. This just seems a bit more of a reliable business, I guess it's really what I'm getting at. But in regard to risks or red flags, I think valuation is always going to be one of the bigger risks with a business like this, that's still gaining traction and starting to really hinge their way toward profitability. But you mentioned something a little bit earlier than I wanted to ask you about, because it feels to me, you know where I stand on crypto, I'm ultimately just apathetic. I just don't care, so whatever.

It does feel like this is something that most crypto bulls would argue is supposed to disrupt. This is something that cryptocurrency is supposed to ultimately disrupt, being able to send money at the drop of a hat from point A to point B regardless of where it is on the face of the planet instantly and either for nothing or for the next enough thing. I'm a little bit skeptical there just because I don't think crypto is really necessarily for the masses, at least at this point, I don't think most people get it still. It feels to me like while someone might point that out, I don't think that's as big of a risk as many might think.

Frankel: No, I could see Remitly incorporating blockchain into the business. I could see them using blockchain technology to send money faster and more efficiently. I'd actually be surprised if they didn't have some blockchain operation going on behind the scenes right now anyway. But as far as cryptocurrency, that's not as much of a thing for people who need to send money back to developing countries. You might think it is, but it's really not, no one who's trying to send money back to Mexico or to other Latin American nations, is going to go convert that money to Bitcoin, or whatever cryptocurrency, which isn't free by the way, it's not free to send money with Bitcoin.

Moser: I know.

Frankel: I can tell you that for a fact. Or whatever cryptocurrency you are talking about and then send it through an app or whatever. Then the person who gets it has to convert it back to their local currency. Because you're sending money to Mexico and El Salvador or wherever so people could pay bills and pay living expenses. You don't want that extra step of having to convert it back to fee-out currency. Over a third the customers of Remitly don't have bank accounts or they're under-banked. It's not like they could hit a button in a crypto app and send money to a bank account. It has to be an all-in-one solution, which is why I really don't see the cryptocurrency thing being a big disruptor to this business.

Moser: I tend to agree with you. Perhaps somewhere in the distant future if it becomes a bit more mainstream, then we'll see. But yeah, you are right, this is money that is being sent for living expenses. I remember when we lived in Cairo, Egypt years ago and we were there for three years. We had a housekeeper/nanny that worked for us and she was Filipino. She would send money back to her family, the Philippines every couple of weeks, and that was something that they were relying on her, now this was 2002, 2003, 2004, really before any of this came to light. But I vividly remember her having to go to the Western Union shop there in Cairo to go knock that out. It was always a hassle, but it was always crucial. It was something that her family back home was relying on, that really just doesn't change, so that's why I think this is such an attractive market and that's why I think Remitly presents such a compelling story. It's a company I'm certainly very interested in. I think I'll hang on the sidelines for now, having some familiarity with this market, with this industry and evaluation. I don't think this is a buy at any price business, but I do think it's an interesting business for sure that I'll keep on the radar. I don't know what your feelings are.

Frankel: I'm not completely sold on it right now. I'd want to see a couple more quarters of maintaining this growth, especially now that they're public and have a little more cash in the bank. I'd like to see if they can use that to keep innovating, bringing out new products and things like that. But it's definitely one that's on my radar. I like it.

Moser: Well, we'll leave it there, Matt. I appreciate you taking the time to dig into Remitly and talk shop with me today.

Frankel: Of course, it's always good to be here.

Moser: That's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us, for Matt Frankel. I'm Jason Moser. Thanks for listening, and we'll see you next week.