With stocks in a bear market, the amount of new initial public offerings (IPOs) has dried up compared to 2020 and 2021. As of the end of May, only 114 companies had gone public in the United States so far in 2022, down 78% from 2021. With the Federal Reserve raising interest rates, inflation running rampant, and fears over geopolitical tensions, companies are getting skittish about how their stocks will fare when they start being traded publicly. However, with over 1,000 companies going public last year, there are still plenty of new entrants to the public markets for investors to take a look at.
Digital remittance company Remitly (RELY 1.29%) is my top technology IPO to buy in August. Here's why.
Strong Q2 Results
Remitly was founded in 2011, aiming to disrupt the international remittance industry. Remittances are money sent abroad -- typically from immigrants -- that must be processed through foreign exchange and country regulations. Historically, these services were expensive, with 3%-7% fees on every transfer. But with the rise of smartphones and internet penetration around the globe, companies like Remitly can offer instant digital transfers for much lower costs.
The disruption has helped Remitly win remittance volume over the last decade. This trend continued through the first half of 2022. In the second quarter, active customers grew 43% year-over-year to 3.4 million, payment volume increased 40% to $7 billion, and revenue increased 40% to $157.3 million. If Remitly can hit its full-year 2022 revenue guidance of $627.5 million, its revenue will have grown at a compound annual growth rate (CAGR) of 71% since 2019. This skyrocketing revenue performance makes Remitly one of the fastest-growing companies in the world.
But what about profitability? With major IPO expenses and large allocations to marketing expenses, Remitly is unprofitable right now, with a $39.4 million operating loss last quarter. While something to watch, if the company continues to grow revenue at a strong double-digit rate with great unit economics (gross margins are approaching 50%), the company should have no trouble reaching positive operating margins once it matures. Plus it already generates positive operating cash flow, at $26 million through the first six months of this year.
Large addressable market
What excites me about Remitly is the company's large addressable market. Remittance payments to low-and middle-income countries (Remitly's target customer) are approaching $700 billion a year, and have grown substantially over the last few decades. Annualizing Remitly's $7 billion in Q2 payment volume to $28 billion, the company only has an estimated 4% share of a massive and fast-growing market.
This large market, combined with better fees and a mobile-first approach that more and more customers are comfortable using, is why Remitly's revenue has grown so quickly in the past, and why it should continue to grow at a strong double-digit rate for the foreseeable future.
Since Remitly is not profitable, it is hard to value the stock. But at a market cap of only $2 billion, the company is not trading at a premium price, at least compared to its growth potential. If it hits revenue guidance of $627.5 million in 2022 and its gross margin expands to 50%, Remitly will generate $314 million in gross profit this year for a price-to-gross profit (P/GP) of 6.4. This is right around the market average, and indicates investors are not pricing in much growth for this business for the next three to five years.
If you believe Remitly can continue putting up strong growth rates and eventually reach profitability, the stock can provide outsized returns to shareholders this decade.