RELY and RCM Report
There have been a LOT of positives in the market this week on really big, macro issues.
First, the U.S. Treasury funding report was a major concern that wasn’t as bad as feared (especially on the long end) and that overhang has been somewhat diminished, helping to push down yields (10-year yield at 4.67%) and give a boost to equities.
Second, the FOMC meeting wrapped up with all members voting to hold rates steady. Jerome Powell’s press conference wasn’t as hawkish as some might have expected, and while the Fed isn’t talking cuts just yet (at least not publicly), analysts and market expectations strongly suggest the Fed is done, with first cuts now expected mid-2024 and a lower end-of-year rate (4.57% vs. 4.7%) than expected a few weeks ago. We will see – these are just market projections and not set in stone.
Lastly, a lot of the economic data (jobs, productivity) has ridden that dark and hazy line between “bad is good”, “bad is bad” and “good is good” such that the market’s takeaway (for now) is that “it’s neither too good nor too bad”, i.e., soft landing still on the table.
Despite all this, there are still a lot of earnings potholes out there. And that brings us to our update which, unfortunately, features two stocks in our portfolio doing exceptionally poorly today.
Before we get to those, it’s worth sharing that small caps, as an asset class, look extremely attractive from a valuation and relative performance (i.e., underperformance) perspective right now. It would likely not be a bad idea to add to (or initiate) positions in ETFs such as the IJR, VBK, etc., either looking for a shorter-term swing trade or for longer-term positions.
On to the two stocks.
Remitly (RELY) reported Q3 results that beat expectations on revenue and adjusted EBTIDA but spooked investors because of a step up in advertising costs. The concern is customer acquisition costs (CAC) are going up, which hurts lifetime value (LTV) of each customer (i.e., how much is “made” off each customer over the lifetime of their relationship with Remitly).
More on that in a second. Back to the numbers.
Revenue was up 42.8% to $241.6 million (beating by 1%) while adjusted EPS of $0.00 missed by $0.04. Guidance for the full year was increased by roughly $16 million more than the Q3 beat (that’s good), with revenue now seen in a range of $935 - $943 million versus consensus of $929 million while adjusted EBITDA guidance of $36 - $41 million straddles consensus of $39.8 million. Active customer growth was 41% and send volume grew 36%. International growth was particularly strong (again), with Canada up 40% and the rest of the world up 90%. That all sounds pretty good.
Now, the “bad” part. The conference call today was littered with questions about increased marketing spend, competitive dynamics, i.e., Western Union (WU), and LTV-to-CAC ratios. Bottom line is management says they’re going on the offense, that they see opportunities to raise awareness of the brand and that, in concert with the partnerships with MasterCard (MC) and Visa (V), will pay dividends in 2024.
So it’s like a one step back in Q4 2023, two steps forward in 2024. The issue is that the market, and investors, want concrete numbers and these “top of funnel” investments are somewhat non-targeted. They’re intended to raise brand awareness, which can be tough to measure.
Combine that with a stock that has done phenomenally well (especially compared to other specialty fintech names) and profitability guidance that underwhelmed and a pullback is to be expected. That said, RELY down 30%+ today seems just plain stupid.
There are no guarantees of course but I expect this stock will bounce. It may take a day or two (the typical rule is wait three days after an “event”). In terms of managing the position, I am keeping at buy right now as I think the near-term upside is a lot greater than the downside. We’ll see where RELY is in a week or so, and go from there. BUY
RCM 1 (RCM) delivered a Q3 that was good in the grand scheme of things but there are a lot of moving pieces here that, when all taken together, paint the picture of an industry (healthcare), and company, facing a lot of competing pressures. Theoretically, those pressures mean RCM 1’s services are needed now more than ever. But healthcare is sooooo complicated and these providers aren’t necessarily flush with cash and that seems to be somewhat limiting RCM’s ability to execute. There may be some internal issues re-merging as well. Case in point, the company had recently landed a contract with Pediatrix, and following implementation issues (insert lengthy explanation of why) the two parties are going their separate ways. But, this will take a long time to wind down and transition the client to another service provider so it’s not like this won’t hang over every conference call in 2024. There are a lot of details we could get into here, but the bottom line is this is not the stock for right now. We exited half of our position early last week and we’ll exit the other half today. SELL REMAINING HALF
