Is This Recent Fintech IPO Worth Your Money?

Every investor wants to have a stake in the next big thing that has the potential to yield significant returns in the future. With the speed of the market, it’s no surprise that investors watch closely for companies that are holding initial public offerings (IPO) in an attempt to get lucky by getting into a “winner” early. But what about the companies that don’t quite look like winning IPOs?

Financial technology company Remitly Global ( RELY -0.14% ) came public less than three months ago and has already seen its stock decline by more than 50%. Though fintech stocks have garnered lots of investor attention lately and tend to command lofty valuations, Remitly appears to be an exception. Let’s see whether or not this young financial services provider deserves investors’ dollars. 

Image source: Getty Images.

A better global payment system

Before diving into Remitly’s role in the global payments space, it’s probably best to provide some context on the remittance industry. 

Remittances are a type of cross-border money transfer often used by migrants to send money back to their families. Though that might not sound like a massive opportunity, the actual numbers are astounding. According to Remitly’s pre-IPO S-1 filing, there was approximately $1.5 trillion in remittance inflow volume in 2020. While the industry is still currently dominated by companies with large geographic footprints designed for walk-in services, remittances are becoming increasingly digital and Remitly is trying to capitalize. 

Remitly provides a mobile-first solution that allows its users to safely send money across more than 1,700 different corridors (country-to-country payment channels) at a cheaper cost than many of its peers. With Remitly’s mobile app, users can easily set up an account, choose a transaction value and preferred currency, and have the money transferred directly to a recipient through a variety of delivery methods. Delivery methods include bank deposits, home delivery, cash pickup, and mobile money. 

Remitly by the numbers

Thanks in part to the ease of use of Remitly’s mobile solution, the company has quickly expanded its active customer count. In its most recent quarterly report (period ending Sep 30), Remitly touted 2.6 million active customers, which is 51% more than the year prior and almost triple its count from the end of 2019. 

While this growth in users is no doubt impressive on its own, those active users are also sending more money with Remitly. In fact, in the latest quarter, Remitly’s average revenue per active customer increased 12% versus the same period a year ago. Between the boost in users and this increased volume, Remitly generated a 69% increase in revenue for the quarter and expects to deliver between $445 million and $450 million for the full year. 

Although the company is currently unprofitable on a GAAP basis due largely to its heavy investments in marketing, it touts a strong gross margin of roughly 61%. Given the fresh stage of the company, the large marketing expense is not surprising. If the company is able to continue increasing volume and margins, the expense will prove to be worthwhile. Also, its adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) — which is intended to be a proxy for cash flow — continues to trend in the right direction.

Long-term outlook and risks

Unlike most of the financial technology space, the remittance industry has seen relatively few start-ups succeed in recent years due to the high regulatory barriers to entry. In order to facilitate remittances, companies have to follow rigorous compliance standards and possess money transfer licenses for each country of operation. This can be both a capital and time-intensive process, which tends to discourage most would-be start-ups. This means that the risk of Remitly losing customers to a barrage of upstarts seems low. 

However, despite the recent growth, the business is certainly not without its risks. Competitors such as Western Union, MoneyGram International, and Wise are all fighting for market share in the digital remittance space, which could result in decreasing transaction fees for customers. A similar scenario played out in the equity commissions business in recent years due to the rise in popularity of free solutions like Robinhood Markets. And, noting that names like Western Union and MoneyGram are already well known for their in-person remittance services, it could be an uphill battle for Remitly.

Following the recent sell-off in its stock, Remitly currently trades at a market cap of roughly $3.4 billion, which puts its price-to-sales ratio at just over 8 times. While that isn’t too crazy of a multiple given the company’s current growth rate and the profit margins it could potentially have at scale, it’s certainly not a screaming discount.

Despite the risks it faces, I do think Remitly’s mobile-first approach could help the company gain market share in the long run. But I’m hesitant to pay any sort of a premium right now given that the intense competition could lead to declining take-rates for the remittance industry as a whole.