A Deep Dive Into Remitly

It is an extraordinarily common pattern. Young people will emigrate to a major western economy, like the United States, or Canada, etc., to find well-paying employment. Gainfully employed, they will then dutifully and regularly transfer funds back to family in their home country to support healthcare, education, and other basic needs.

The process of transmitting these funds across borders is known as "remittance". And the Green Screen stock we're going to look at today is becoming a major player in this large market: Remitly (RELY).

Let's take a closer look and determine if Remitly deserves a place on our Watch List.

The Business

The core business of remittance isn't difficult to understand. Basically, it is just a way to transfer money from one financial institution to another in a different country. The facilitators (like Remitly) make their money by charging a flat or percentage fee on the amount transferred, and a little on top with currency hedges. That's really all there is to it.

Of course, it is a lot more complicated than that at the ground level. Remitly has created a huge network of relationships across the globe with banks, payment providers, and other financial aggregators to enable these transactions. For example, a customer could transfer money from and to endpoints including bank accounts, credit and debit cards, mobile wallets (like Apple Cash), and even cash windows. Remitly has partnerships in over 170 countries and thousands of channels. 7.3 million customers transfer money every quarter through the network.

A key advantage of Remitly is that it is "digitally native". That means that customers use the service through a mobile app, or the website. That makes it more convenient vs. traditional providers like Western Union or MoneyGram that were built on physical locations and are just now transitioning to digital offerings.

Growth and Revenue Recurrence

Let's start with growth. There's a lot of it! Remitly's 3 year CAGR is a cracking 54%, and 2024 revenue growth should be close to 35%. Both active customers and send volume are growing at roughly similar rates. Analysts expect close to 25% annual growth over the next 5 years.

I see no reason Remitly cannot achieve this. Consumer-to-consumer cross border payments alone exceed $1.8 trillion dollars annually, and are expected to reach $3.3 trillion by 2030, an 8% CAGR. Remitly currently has under 3% of this market - there is PLENTY of room to grow share, on top of underlying market growth. Double-digit growth rates are well within reach for 10+ years here.

Revenue recurrence is less certain. At a glance, remittance transactions are one-time transactions that don't recur automatically (usually).

However, I believe you can argue recurring revenue here for a few reasons. One, the revenue model is clearly a "toll booth" one, where the firm takes a little off the top of every transaction.

Two, a LOT of immigrants that utilize remittance payments do so on a regular basis, as their family relies on them back home. Regular bi-weekly or even monthly transactions are not at all uncommon. Remitly reports their customer retention at over 90%, a sure sign that most customers do indeed use the service over and over again. This is not like buying a car or taking an expensive vacation - these are non-discretionary and regular transactions for many that use them.

Given these factors, I think Remitly passes the growth and revenue recurrence tests.

How Deep Is The Moat?

Moat is difficult to argue for Remitly. This is a space with a ton of players, many of which are better known and larger. Just to name a few competitors, there are previously mentioned Western Union and MoneyGram, as well as Wise, PayPal's Xoom, WorldRemit, Revolut, and many more. Switching costs for customers are very low, and there is no network effect here as any individual customer only cares about a limited number of nodes (i.e. they get no advantage from a larger network, unlike a marketplace or credit card).

That leaves quality of service as Remitly's key advantage at present. Here it scores very high. Its app rating is near perfect on both Google and Apple's app stores. We mentioned customer retention at 90%, which is very high for the remittance industry. Clearly the firm is competing well, although obviously quality is not an intrinsically durable advantage.

One saving grace here is the size of the market. At nearly $800 billion, there is certainly plenty of room for a lot of successful companies here. Remitly doesn't need to become the market leader or even close to be a very successful investment.

Management and Finances

Remitly hits the marks on management. It is founder-led, with co-founder Matt Oppenheimer still the CEO. He maintains a decent 3.7% financial stake in the company. Another co-founder, Josh Hug, is a board member and vice chairman. He owns 2.5%.

Insiders in total own just over 8% of the shares, a better-than-average number but somewhat small for a young company like this.

It is hard to argue too much against management's performance to date. Remitly has done a great job of growing revenues, customers, and transfer volume, and in building out its network. The company has been cash negative, but margins have been steadily improving and cash went positive this year. While Remitly has made a few acquisitions, they have been small and strategic ones which I'm fine with. There is virtually no debt on the balance sheet.

Risks

Competition is a risk. As we've discussed, the market is very large and ripe for many successes, but Remitly will have to spend plenty in marketing and probably have to participate in any pricing wars that may break out. If the company cannot meet my pretty aggressive growth model, the fair value target may prove too high.

There is some company risk here, too. This is a young firm that just went public in 2021, and to date it has been unprofitable and cash negative. The stock has trailed several benchmarks. We are trusting management to steer the company into more industry-average cash flow margins. If they can't, the fair value target may prove too high.

Finally, there are the industry risks. Cybersecurity, fraud, illegal activity, compliance with regulations... all of these could cause negative news events that drive the stock down.

There also seems to be some geopolitical sentiment growing worldwide against open borders. This could lead to a slowdown in new clients.

Conclusion

I thought about Remitly for a while. Obviously, its growth trajectory and the size of the market are both pretty attractive. I like that it is founder-led, the culture is very customer-focused, and that its financial picture is strengthening. I'm also put off by all of the risks listed (which I feel are very real), and by the fact that it is hard to argue for any kind of economic moat.

Finally, there's just the curious matter of even very established firms in this industry having low valuations. Remitly actually has a HIGHER valuation than Western Union, a company with 170 years of history and over 12x the revenue!

I think it is plenty possible that Remitly performs very well going forward and we regret this "pass" call. If so, oh well. There are no called strikes in investing. For those interested, I think the stock is worth about $23/share, and it trades under that at present. But I'm not adding it to the Watch List