Cabot Small-Cap Confidential Issue: September 7, 2023

The Big Idea

It used to be that immigrants looking to send money back to their families would send cash. Or maybe get gouged by 8% (or greater) fees to make an electronic funds transfer through a legacy provider.

Even in the current age of digital payments, it’s not always easy, fast or cheap to send money.

That’s sort of amazing given that the World Bank and IMF estimate the market for global money transfers tops $1.6 trillion just for migrant remittance volume.

And that it’s growing by about 5% every year.

Just over a decade ago, a young man working and traveling overseas saw an opportunity to modernize this clunky and fragmented market.

He saw that the big players had brick-and-mortar locations that weren’t always close to where people needed to send money from, or where the funds needed to go.

Even the big banks didn’t have great solutions aimed at immigrant populations.

While some digital payment providers have popped up over the years a lot of them still don’t have platforms that have truly caught on for immigrants. They are often slow, challenging to use, don’t clearly state exchange rates and, overall, just don’t instill a lot of trust.

Today, the aforementioned entrepreneur’s vision – to transform the lives of immigrants and their families by providing the most trusted financial services on the planet – has come to fruition.

By focusing on the unique and often local needs of customers, the company he co-founded has been grabbing market share from the lumbering giants that failed to realize people didn’t need to travel long distances to wait in line and talk to an agent before sending their money off.

They just needed a mobile phone and a good app.

That said, even with this company’s innovative solution and huge success, it still only holds about 2% of migrant remittance volume.

That means there’s a ton of opportunity out there. And it’s why we’re jumping in with a position today.

The Company

Remitly (RELY) is a mission-based digital financial services company providing cross-border remittance solutions to immigrants and their families in over 170 countries around the world. Its market cap is $4.6 billion.

The company was founded in 2011 when co-founder and CEO Matt Oppenheimer, who previously worked for Barclays, was living in Kenya and realized how difficult, opaque and expensive it was to send money internationally.

He saw an opportunity, especially as mobile device usage exploded globally, to transform hundreds of millions of lives around the world by creating a scalable remittance solution that put customers first.

Today, Remitly helps families transfer money internationally across 100+ currencies with no hidden fees. Most money is sent from the U.S., Canada and the EU. A few of the largest recipient countries include India, Mexico and the Philippines.

The company has relationships with major banks, including Barclays (BCS), Chase (JPM), HSBC (HSBC) and Wells Fargo (WFC), as well as leading payment processors, such as Visa (V), that give customers options to fund remittances with bank accounts, card-based payments or other alternatives.

It also has many partners around the globe (banks, mobile wallet partners, cash pick-up locations, etc.) that give customers a choice of where to deliver money.

Over the last twelve months, $34 billion has been sent across the platform. And in the last quarter, the company had over 5 million quarterly active users.

Perhaps most impressive, Remitly grew revenue by almost 50% in the most recent quarter, while delivering a profit. And EPS is poised to double next year.

In short, the trends are good.

Platform & Solutions

Remitly’s digital cross-border remittance platform can be used via the web, or a mobile app. Customers simply set up an account and are off and running, sending money internationally within just a few minutes.

Customers and their families can track the status of the funds in real-time.

The technology platform has five key components:

Core Transaction Engine: Runs the entire transaction, including pricing, foreign currency, funding, processing and disbursement.

Customer Experience Engine: Leads customers through the process with corridor-specific prompts in their local language and with real-time support.

Disbursement Network for Partners Integrations: Supports a ton of delivery methods for customers and recipients in over 170 countries.

Marketing Technology: Supports localization strategies and helps Remitly’s team capture and analyze data for product improvements and to deliver ROI.

Machine Learning (ML) Engine: Real-time fraud scoring and payment authenticator that lets customers know what’s going on and evolves to ensure compliance with global and local regulations.

Growth Initiatives

Acquire New Customers: Remitly is doing a fantastic job bringing new customers to its platform. A year ago, it had 3.4 million customers, it now has just over 5 million. That’s a 47% increase.

Geographical Expansion: Remitly is growing fast in both the U.S. and Canada (+36% and +44%, respectively, in Q2), but the Rest of World (ROW) growth is by far the fastest (+120% in Q2). While ROW remains the smallest slice of the revenue pie (21% currently), such rapid growth is moving the needle (was just 14% a year ago). The February launch in the UAE and a Dubai office was the latest expansion example.

Operational Efficiency: Management is working hard to operate an efficient business. In Q2 2023, operating expenses, marketing costs and transaction expenses all fell as a percentage of revenue. Gross margin was 66%, about 4% higher than expected. There is a limit to how hard Remitly can squeeze expenses, but for now Wall Street likes the profit margin improvement trend.

Launch New Solutions/Product Improvements: As fund flows grow across the platform Remitly captures data that informs new product development and incremental product enhancements that drive customer loyalty, customer acquisition and higher fund flows.

Expand Partner Network: Remitly’s partner network continues to grow, reducing complexity, transaction and customer support costs while also improving customer experience. The network now flows through 4,800 corridors, over 4 billion bank accounts, 1.2 billion mobile wallets and 460,000 cash pickup locations. It’s worth noting that Western Union has about 20,000 corridors, so Remitly has a lot of room to expand.

The Business Model

Remitly generates revenue from transaction fees (vary based on currency, funding and disbursement method, etc.) and foreign exchange spreads (vary based on the company’s ability to buy foreign currency at advantageous spreads). Customer promotions may affect both. At the end of the day, the biggest factors affecting the business are active customer count and send volume (in dollars).

The Bottom Line

Remitly grew revenue by 43% to $653.6 million in 2022. EPS was -$0.11, an improvement from -$0.24 in 2021.

In the second quarter of fiscal 2023 (reported on August 3) revenue grew by 49% to $234 million (beat by 8.4%). EPS of $0.09 beat by $0.09. Second-quarter send volume grew 38% to $9.6 billion while quarterly active customers grew 47% to 5 million.

Looking forward, analysts expect full-year 2023 revenue to grow 42% to $927 million. With EPS now consistently positive since Q4 2022, full-year EPS is seen around $0.20. Looking out into 2024, revenue is expected to grow by at least 25% (to around $1.16 billion) and EPS should roughly double (to $0.40).

Risk

Partner Network Challenges: Remitly has been successful in building a network that makes it easier to move funds around the world. Anything that reverses this trend could undermine its business.

Regulations and Anti-Money Laundering (AML): With a plethora of international laws, regulations and AML programs across the globe, Remitly constantly runs the risk that some business practices could fall outside the lines of what is allowed.

Privacy, Security, Fraud, Data Protection, etc.: It doesn’t take many mistakes to impact trust in a money transfer platform. So far, so good. But there’s always the risk something could go wrong.

Competition: The global market for remittances is fragmented, with both traditional and digital cash-based players. So far, Remitly is growing far, far faster than the competition. But this could change if it makes a few mistakes or the market evolves in unexpected ways. Most notably, Western Union has been more aggressive on pricing lately, however with little impact to RELY’s positive trends.

Competition

Western Union (WU), International Money Express (IMXI), Wise (UK-based), OFX Group (Australia).

The Stock

Trading Volume: 90-day average trading volume is 1.1 million shares ($22.5 million). We won’t move it.

Historical Price: IPO priced at 43 on September 23, 2021. Stock reached an all-time high of 53.7 that day then sold off for the next six months, landing at 8.4 on March 15. RELY was up and down, mostly in the 6.5 to 12.8 range through late February of this year then broke out on high volume above 13 after the Q4 2022 report. The stock has been trending higher since, with a nice +20% move sending shares to around 22.5 on August 3 after Q2 earnings. RELY has walked up just past 25 in the five weeks since.

Valuation: RELY currently trades with an EV/Fiscal 2024 Revenue multiple of around 3.7, not far off from a reasonably assembled peer group. That said, RELY’s above-peer-average-group growth and rising profitability should drive multiple expansion over peers.

Buy Range: Over the next couple of months I expect to keep RELY at buy with the stock trading in the 22 to 30 range.

The Next Event: Goldman Sachs Communacopia & Tech Conference at 4:45 p.m. ET September 7 (today), Q3 fiscal 2023 earnings around November 8.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

October 5, 2023.