Most consumers in the U.S. don't even think twice about using a credit card or having access to a bank account, but the banking sector in emerging markets is not available to all consumers, or even trusted in places such as Russia.
Two stocks capitalizing on this offer investors the opportunity to invest in the potential growth in money services in countries such as India, Mexico, and Russia.
The two companies offer different twists on the theme, but both provide unique exposure to the growing need for holding and transferring money electronically in emerging markets. Xoom (NASDAQ:XOOM) provides a digital money transfer platform where U.S. residents can quickly transfer money to accounts or relatives back in emerging markets. Qiwi (NASDAQ:QIWI) offers Russian consumers the ability to make electronic payments for a region that lacks a certain level of trust for banks or revealing credit card numbers online.
Unfortunately for new investors, both stocks have already zoomed higher at the same time insiders are cashing out. The combination is not ideal, but both stocks offer potential for long-term growth serving these markets.
Xooming high on India potential
Xoom is attempting to transform a business that has been around for decades by transitioning the money transfer service to digital forms including mobile apps in both English and Spanish. Western Union (NYSE:WU) and large banks dominate the money transfer business, yet the service was dying for efficiency improvements and a transition to online options that Xoom provides.
Back in July, the company announced money transfers for non-resident Indians to bank accounts in India in as little four hours during banking hours in India. The service is available via all major banks in that country. In addition, the company launched mobile apps in Spanish for Android and iOS devices allowing customers to complete a quick send money transfer with the slide of a smartphone.
In early September, insiders sold over 2 million shares at $30.50 to cash out over $60 million after Xoom had soared following the IPO. Xoom is only expected to reach a revenue base of $115 million this year, while Western Union generates over $5.5 billion in revenue each year. With the potential that exists to capture that market share and grow international money transfer services, insiders might be concerned that the new pricing initiatives by Western Union could slow down growth.
Will Russians always distrust banks?
Qiwi provides payment services in Russia and the CIS via physical, online and mobile channels. Consumers in Russia typically distrust banks and often dislike revealing credit card numbers online. This distrust led to creating the network of terminals that have evolved into 169,000 machines, far exceeding the amounts of any bank's ATMs.
With the proliferation of smartphones and trusted phone carriers, the kiosks method of banking appears outdated. The company will need to transition to the mobile world, where PayPal, owned by eBay, is pushing to become a larger competitor.
In early October, insiders including Mail.ru and its CEO sold roughly $285 million worth of shares at an offering price of $30.50. As with typical IPOs, and in the case of Qiwi, the selling shareholders have been invested in the company for years. The sticky question for investors is whether the stock offers any value after a 150% gain encouraged such a large sell by insiders. Do these industry experts expect online banking and PayPal to become better competitors as those services mature?
Regardless, one cannot deny the attractive growth and access to the region in Eastern Europe and Russia. In the latest quarter, revenue grew by 62% over the previous year, and the company forecast the yearly revenue to grow over 30%. Even more interesting is the significant profit margin of around 30%. The company virtually prints money from providing these services.
The growth potential in Qiwi and Xoom are enormous. With insiders cashing out after huge stock gains, one has to wonder if the competitive landscape is set to change. The potential to become a money services leader in India or Russia is huge, but the price needs to be right to make it profitable for an investor.
Mark Holder has no position in any stocks mentioned. The Motley Fool recommends Western Union. 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.