Triumph Financial (TFIN 0.69%), a bank that specializes in serving the freight industry, saw its stock fall by about 28% over the last year. That drop is even after a 29% rally so far in 2023.
Investors sold off the stock after seeing higher expenses, worse-than-expected losses in its burgeoning payments division, and concerns about a freight recession in 2023. The stock traded at a high valuation following the run-up in the market in late 2021, so it fell largely in line with the broader tech sector.
While near-term headwinds remain, the payments network Triumph is building -- TriumphPay -- has the potential to greatly disrupt the freight industry. This is why investors might want to look past some of the current challenges the company is facing. This will be a stock you'll be happy you bought in 2025. Here's why.
Triumph is building an open-loop payments system
Before moving into payments, Triumph was -- and still is -- a very successful bank that specializes in the factoring business. Factoring means the bank would buy trucker invoices at a discount before they got paid out, proving needed liquidity to these truckers. Once the invoice was paid out Triumph would make a nice profit by collecting on the full invoice.
Image source: Getty Images.
Through this factoring business, Triumph and its CEO Aaron Graft determined that there was a bigger problem in the trucking business. The way invoices are created, processed, and eventually paid out and settled was inefficient. The process involves tons of manual labor, including multiple phone calls and lots of paperwork. In 2019, Triumph set out to ease this friction. But it was really in the middle of 2021 with its acquisition of HubTran that Triumph decided to create an open-loop payments network for truckers, shippers, freight brokers, and factoring companies.
This allows for parties on TriumphPay to participate in what the company calls "network transactions" in which invoices between multiple parties can basically be processed like automated credit card transactions. TriumphPay eliminates manual tasks, provides presentment and audit services, and can help factoring companies source business as well.
Building a network like this required a lot of investment. Expenses at the company grew more than 18% in 2022. Graft told analysts that he expects expense growth to begin to moderate, but he also warned that expenses in the fourth quarter of this year will likely be up 10% to 12% year over year.
TriumphPay reported an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of negative 117% in the fourth quarter of the year. Graft said he expects the company to exit 2023 with an EBITDA margin somewhere in the range of negative 40% to negative 60%.
TriumphPay is gaining traction
While the process of building out an open-loop payments network has not been easy on expenses or TriumphPay's bottom line, the network is growing and starting to show just how valuable it can be.
TriumphPay piloted the first network transaction in early 2022. Since then, the network has facilitated roughly $1 billion worth of these transactions. At the end of 2022, there were 580 freight brokers and 70 factoring companies on the network. The total yearly payment volume on the network came out to more than $23 billion in 2022, and there was almost $15 billion of factor volume purchased through the network. TriumphPay generated close to $37 million of annual revenue last year.
While TriumphPay is not really close to being accretive to earnings, what did impress me in the last quarter is the pricing power demonstrated by the network. Like any payments network, TriumphPay collects percentage fees on network transactions, so as transactions (and transaction sizes) grow so does fee revenue. Graft said the company is "monetizing the network at a greater rate per million than we were a few years ago, which gives us the opportunity to achieve the revenue that we're after, short of even the volume we're after."
Tracking progress
TriumphPay may be further away from profitability than investors would like at this point, but the network is proving to be tremendously valuable to the freight industry, as evidenced by the network's growing transaction volume and pricing power.
Management previously said the company can hit $75 billion in network volume and $100 million of revenue exiting 2024, so this is a big milestone to track. While the volume goal remains a question, management does still think the $100 million revenue target is attainable. Another big thing management is focused on and that investors should track is the network adding additional freight brokers that can really move the needle on volume.
I think it would be great to see Triumph get to EBITDA break even by mid or late 2024, while also hitting the $100 million revenue target. But as long as TriumphPay continues to show increasing value for the freight industry, I think this will be a great stock to buy now and own in 2025 and beyond.
