Chit Chat Stocks - Remitly (RELY) | Not So Deep Dive

Episode Date: November 23, 2021

Remitly is a leading digital services provider for immigrants and their families. A remittance is typically a sum of money sent across borders. The company currently offers its services in approximately 135 countries. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Remitly. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:15) Industry | (8:15) Management & Ownership | (10:37) Valuation | (13:06) Earnings | (14:42) Balance Sheet | (17:11) Our Analysis | (19:33) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode. We got Ian Gray on this week, and we're talking Remitly. Whose choice was this? Was this yours, Ryan, or Ian's?

Yours, Ryan? You, yes. I had to listen back to figure out which one we chose, but the options were Allbirds, Remitly, and Wise, and we chose Remitly. All right. Yeah. And we're going to do all birds with Brad. And hopefully, I think we should do wise to kind of get the trifecta. We did MoneyGram with Luis Sanchez. If you're interested in Remitly, go listen to that interview as well. That's a competitor to them. But do any of you guys know? Ian, have you heard of this company before? I had heard of this company before, actually, just recently, but never used it and don't know anybody who's used it.

All right. And this is a recent IPO. So we'll get into that. We're going to basically cover the S1 here, but it is public. I'll let Ryan introduce it, but first we have to talk about our sponsor for the Tuesday episode, Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10X over the next 10 years or compound at 26% per year. So a high hurdle rate, they're taking big, or maybe not big bets, but they're doing research reports on companies that have a lot of potential that are high growth names, and they've lived up to their reputation so far. Shopify was picked at $77 a share. Okta at $64 a share. Cloudflare at $39 a share. I think I can share that Upstart was one of the picks, you know, not recently,

don't want to spoil any recent picks, but was researched earlier this year after their IPO. And that has been a huge winner for them as well. Saw that one early. Fantastic track record at this service, even while, you know, we've had some, you know, tough times for some of the high growth stocks recently, you know, they're picking the quality ones that have held up over the long period and their track record can show it. And I will add that we are talking about Upstart with Chris on an upcoming show. Yes. He runs potential multi-bagger service. We got that coming up probably end of November, early December should be very fun. If you want to become a multi, You can go to Seeking Alpha and look through From Growth to Value.

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Lock yourself in for a year. It's a great service. All right, Ryan, do you want to introduce Remitly? Yeah. So Remitly, according to them, is a leading digital financial services provider for immigrants and their families in over 135 countries around the world. For anyone that's unfamiliar, remittances in the context that we're talking about today are money transfers to other countries, primarily from immigrants. So let's say a family member leaves their home country for a new job. Every once in a while, they will send back money to their family. That is a remittance. And I'm going to steal a passage from a write-up that our friend Louise did when he covered

MoneyGram. I hope he's okay with us saying this. If not, he can let us know after. But he says, the cross-border money transfer industry has significant barriers to entry. Every country requires a money transfer license, and there are strict and specific compliance standards due to the need to ID customers and trace funds in order to prevent money laundering and other illicit financial transactions. Furthermore, there are significant operational and logistical challenges involved in operating

a global payments network with hundreds of local and regional partners. So that kind of gives a little bit of an overview of the remittance industry broadly. And so Remitly themselves offers a simple and reliable way to send money over a mobile centric platform. So the way it works, someone sets up or sets up, makes an account. They choose the recipient they want for who they're going to send money to. They choose how much money they want to send and how fast they want it to get there. So either express or economy, I think are the two options.

It's kind of like, think about if you're sending money back from your Venmo or your cash app to your bank account, you can expedite it and you'll have like a larger fee, same principle. And then the last step is the method of delivery. So you can choose either a bank deposit, a home delivery, a cash pickup, mobile delivery, or debit card deposit. Remember that a lot of these receiving countries don't have the, maybe they don't have the technical infrastructure to just do an easy mobile deposit. So they might have to go there and actually pick up the cash.

And so that's the basics of the business. And Remitly generates revenue in two ways from that process. So first is transaction fees charged to customers. This is exactly what most people would think about how they would make money. These rates can vary depending on the corridor. So from different country to different country, the rates can change. And then they can also vary depending on the delivery method. So how it's being picked up, what kind of process it's being received in.

And then the second way that they might make money is foreign exchange spread. So this is the difference between the foreign exchange rate offered to customers and the foreign exchange rate on the company's currency purchases. So I believe, and this part gets a little complicated because they have this entire basically backend part that does this. They have to hold reserves for the currencies, a certain amount, or that's the way they fill the orders. So they can purchase the currencies at a lower rate and then basically make money on the

spread between what they have and what's quoted to the customer. I hope that makes sense. Those are the two ways they make money. It's a pretty easy business model to understand. And then history, as far as the company goes, Remitly was founded by Matthew Oppenheimer, shivas gulati and josh hug i think i'm saying all those names right and i'll let ian kind of touch on the background of matt and how he started it but he identified a problem and the three began to start working for a solution on that problem in 2011 according to geekwire sorry the uh the

initial idea uh for remitly was not actually a remittance service itself but a search engine to find remittance services, they quickly pivoted away from that when they realized it didn't work. And when they started building the product that exists today, they came across tons of legal hurdles, as you might imagine. So another anecdote from GeekWire says, Krista Vore, the lead investor for Remitly Seed Round, recalled having fingerprints taken and completing financial disclosure for regulators in each US state. Building a regulated financial services company like Remitly isn't for the faint of heart, he said. And so they tackled basically the tacked on new corridor after new corridor so different and when we say corridor

that's basically just one country to another country of being able to send money and today they offer exchanges over 1700 different corridors so those come from 17 send countries that's where the money's being sent from most notably the us i think that makes up 77 percent of transactions are are sent from the us and then 115 more than 115 receive countries and they comprise over 75 different currencies um other notes they just went public on september 23rd and they're headquartered in downtown seattle so they must be a good company yes so close to our neck of the woods uh that's that's usually a good sign uh sometimes two the two uh well maybe not the two biggest companies in the world but you know you know right isn't that really right up there yeah they're gonna

be right up there i'll hit industry competition pretty simple here there's 280 million immigrants globally and that is growing that's up from 180 million in 2000 so definitely a growing market of basically people living in other countries i think that's an easy trend to predict that it will continue especially with work from home stuff like that uh 1.5 trillion dollars in remittance volume annually annually that i believe is growing at about four percent but don't quote me on that i forgot to write down that number 40 billion dollars in transaction fees annually that's a big number that probably includes every sort of customer out there or competitor out there. It's not just the mobile ones. And that's a big number to track because there is always the thought

that the take rates will come down, stuff like that. Will that go up over time, the amount of fees that are generated, or will it go down? Kind of a number to watch. Competitors, pretty easy to track. MoneyGram, which we've already mentioned. If you want to hear an episode on that company, go tune into the one we did with Luis. I think that was back in August. There's Western Union, which people are very familiar with. That's the biggest company in the world, I believe. There's Wise, who is another one that's similar to Remitly there in Europe. But they do something similar where they were a startup that's trying to come at this from a mobile-based perspective. And there's Zoom, which is spelled X-O-O-M. That's another big competitor. And there's a

cryptocurrencies are a competitor, or maybe central bank digital currencies could prove as a competitor too, if those become bigger. That's kind of the big looming threat that there's a narrative around that. Cryptocurrencies, that's one of the big things that people tout with them, but it hasn't really happened yet. And we'll talk about later, or at least I have in my future growth opportunity about how actually a cryptocurrency company from one of the biggest companies in the, sorry, a cryptocurrency thing. Cryptocurrency. Yeah.

Well, it's like an app associated with it. It's very hard to describe from one of the largest companies in the world actually had to partner with real mentally to get it started. So the crypto narrative may be a little, it may be far out. It's not here yet. And then banks are also competitors, but they are way behind the ball on the consumer stuff. I think they're more for rich people, but yeah, banks aren't really a competitor. i don't think all right ian do you want to hit management and ownership yeah first i'll make

just one more comment on competition because i think it might be worth it um zoom is owned by paypal it was acquired um like two years ago and so there are some you know between like you said some of the cryptocurrency stuff going on the banks um potentially getting into it um and then paypal with its uh owning zoom there are some big players who are looking at this space and saying um that this could be really lucrative so uh just wanted to throw that out there but as far as management and ownership the ceo is matt oppenheimer and he's one of the co-founders as ryan alluded to um he was kind of inspired for he remotely while he was working for barclays in kenya um he basically saw how difficult it was for many of the people to send and receive money

and just all the friction that it was causing and all the hurdles that people had to overcome just to transfer money and thought, Hmm, there seems like there should be a good, a better way to do this. Um, and it just was, just was kind of just saw the opportunity. And so that's kind of, that was the impetus, uh, for starting remotely. He ended up becoming an entrepreneur in residence, uh, for a couple of years and then kind of while he was building this. And then, uh, at the time he also decided, Oh, I need a couple of co-founders. One of which is Joshua Hug, who is the COO, uh, today. Combined, they own about 6% of the company, so still a fairly healthy stake. And they consistently talk about being very focused on building peace of mind with customers.

And they've highlighted that as the major key to their business. And one of the things that differentiates them is being able to just give that peace of mind. And so they talk about that from everything from the smoothness of the process to not charging fees that are too low, because people think, oh, if they're charging fees that are too low, then it's going to be like this is a sketchy service or something like that. So they try and kind of figure out the way just everything they can do to build peace of mind for customers. That's one of the things they see as their competitive advantage. And so it'll be interesting to see. We've only got one conference call with them so far, but it'll be interesting to see kind of in the future if that

message stays the same. As we learn a little bit more about these members of the management team, And it's for a young company, there's always a little bit of a limited sense of like how much they haven't said a whole lot that they've had to back up yet. And so the longer the company's in existence, the more we get to see if what they said a couple of quarters ago actually came to fruition. So that's something to watch moving forward. Right. I'll hit valuation. Market cap is $4.65 billion. Ticker is R-E-L-Y, which is a good one. Rely, like, you know, you got to rely on Remitly. I think that was a good one. based on their fiscal year or full year, excuse me, 2021 revenue guidance. So that's going to be ending up here pretty soon. So that's why I'm going to use that. Their price to sales is about

10.3 and then price to gross profit is estimated to be about 22 using their trailing gross margin. So premium valuation, well, nothing as insane as some of the other things we've seen with a price to gross profit of a hundred or like 75, stuff like that. Not many other relevant valuation metrics I would use that kind of a flip back and forth between cashflow positive and not being cash flow positive. Earnings have been negative, but that's because they're not burning cash as much as their net loss really states. And I would look at marketing expense, though. That's decreasing as a percentage of revenue. That's a big metric to evaluate whether they can get to a higher and higher profit margin over time because a lot of the other costs, which are just the cost

of revenue associated with the transfers. And then the customer support, those are probably going to scale. And the way they're going to get that profit margin is locking those customers and decreasing the marketing expense as a percentage of revenue or as a percentage of gross profit. But that's really all I have on there. Don't really have much on the stock options front. We'll kind of look at that when their first 10 or do they have a 10Q? I can't remember. I probably should have read that, but I read the S1 and yeah, we'll see those later. but Ryan, do you want to hit earnings? Yeah. So they've only been public for a quarter. And I don't even know if it's been a full quarter, but they've reported a public quarter.

So I'm going to give mostly numbers from the S1. So for the full year, 2020, remotely processed $12.1 billion in send volume. So think about that kind of like GPV and 70%, that's 70% more than 2019. And then on that, the company generated $257 million in revenue that was growing at about 103% year over year. Gross margin for the year was roughly 57%. That's up slightly from 2019. But as Brett alluded to, the company has to pay substantial transaction expenses. So that's going to cap gross margin potential. And then also, if you include customer support costs, which I think you should, because that seems to be pretty variable, the gross margin is a little bit lower. I think I included that in my price gross

problem that I can't remember. Maybe there's, if you think that one day customer support won't need any actual personnel and maybe it can all be automated, then go ahead and X that out if you want. But for the time being, it's pretty much scaled in proportion with revenue. So it seems like a variable expense. And then they had $29 million operating loss for 2020. Their adjusted EBITDA, which actually isn't all that bad of a metric for this business, at least in my opinion, was negative $20 million for the year. So negative 8% adjusted EBITDA margins. They They weren't spending too much money on stock comp, and the depreciation seemed minimal, as you might imagine, for this business.

And they had roughly 1.9 million active customers by the end of 2020. That's double their 2019 figure. And then as far as the most recent quarter goes, their third quarter that they reported, they had 2.6 million active customers. That's up 8.5% quarter over quarter and 51% year over year. They had positive adjusted EBITDA for the quarter. That's fine. Like I said, just track stock-based compensation, especially as we start to get away from the IPO. So last year, it accounted for 2% of revenue. And this quarter, it accounted for 4% of revenue. So if that gets out of whack,

adjusted EBITDA might not be as great of a measurement as I just mentioned. And they're projecting between $445 million and $450 million in revenue for the full year. So all in all, the financials really seem to check out. Ian, do you want to hit the balance sheet and liquidity? Yeah, the balance sheet looks pretty good. They've got $443 million of cash on the balance sheet. They've also got a couple of items that are related to disbursements and the payment of these remittances. And so they've got one that's called disbursement pre-funding, which is an asset of $109 million. And basically, this is the funds that it's already transmitted to recipients before it's received the cash from the customer, because sometimes there's a little

bit of some timing effects on that. And then they have to report that on their balance sheet. And they also have about $80 million of what they're calling customer funds receivable, which I think is related to that, but maybe at a different stage in the process. That's something I wasn't able to really figure out exactly what was going on from the 10Q. Once the 10k comes out, maybe have a little better idea. But that's something to be aware of. I don't think it's something that's concerning at all. It's just part of the business. But it does seem like the cap, the business is somewhat capital intensive, because they have to have the cash to be able to move funds around and not get hit with any timing issues. Partly to deal with that they

have a fairly low interest rate revolver that doesn't have anything drawn on it currently, but I think they can drop to $250 million on it. So that should help with any sort of liquidity issues that they would ever run into. But yeah, that's the, that's the balance sheet. Yeah. Different. Yeah. You need, it's capital white, like in the, they don't need any physical assets really, but they do need the cash or on hand or all the different currencies. So that can make it a little bit difficult for someone to come in and get to

their scale rapidly, or you can't really grow that fast, or you can't like grow as fast as you want maybe because you have to kind of balance that and it's kind of hard. But it seems like they've done a really phenomenal job of that over the years of growing this business. But it's more than a variety of stuff. It looks like they raised a good amount of cash as well

from the IPO. We recently, I don't know if it was with Ian, it might've been with Brad, but we recently looked at another IPO where basically the pro forma cash basis didn't change from prior to the IPO. And it was basically just insider selling. That doesn't seem to be the case for this one.

Yeah, and I think that is the normal course of events. The one where they actually didn't raise money was hopefully an abnormal one because it was a bit misleading. But yeah, they got a big cash balance and they should have funds for the foreseeable future. All right, let's take an ad break. Cox Panoramic Wi-Fi includes advanced security

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included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back. Next up, we have anecdotal evidence. Ian, have you used this type of stuff before? I know none of us are immigrants, So I guess it's kind of hard to tell.

Yeah, I have not used it before. I will say I visited Africa a couple of years ago and it was something remittances and other trying to transfer money around the country or out of the country. There was something that was a fairly big deal. And at the time, many of the people I knew there were transferring money at these different stations that they would just have these pop-up stands almost around the country. Just on every street corner, there's a pop-up stand where you could transfer money to your family. So I do think it's a fairly big issue, particularly in the developing world. Yeah, I don't think it gets noticed as much in the send countries as it does in the receive countries. I'm sure it's more prevalent there. I remember Louise mentioning that for a lot of countries, this is the single biggest contributor to GDP. So this is definitely-

Yeah, 1.5 trillion. It's big. Yeah, that's a huge amount. I don't have, I've never sent a remittance, but I have seen the only somewhat anecdotal evidence I have is I've seen advertisements for Remitly lately at an LA soccer game. And LA and SoCal in general is one of the largest immigrant areas in America. So that seems like a logical place to advertise. So I guess good on them in terms of marketing. But that's really all I have for anecdotal. Yeah, I got nothing. Let's move to future growth opportunities. Ian, what do you have? I have one final thing on anecdotal evidence. It is the official, Remitly is the official global money transfer partner of LAFC. That's where I saw it. That's where I saw it. Yep. They're getting into the MLS. They're getting in at the right time, right? The MLS is going up at this point. So, um, but as far as a future growth opportunity, they have, they've recently launched, um, something that they're calling passbook, which is kind of their, um, Neo bank type product.

And so it allows people to open checking accounts currently. Um, you know, they can send money through remotely. They can get their paychecks into this, um, bank account. They can get a debit card for it, that type of stuff. And they're talking about how they want to add more products to that. and one that I would be kind of interested in would be lending. And there've been hints that they're going to get into lending and in doing some research for this, I've stumbled across a job listing. So if anybody needs a job, they've got a listing for head of lending, which they say

will report to Passbook's VP of product. You will lead a team to launch our lending product and own the P&L. Going from zero to one will require you to be hands-on day-to-day while simultaneously obviously charter charting a longer term vision and strategy. So, you know, I think they're clearly looking to get into lending. That's something that they see as a big business opportunity. And I think that the way that they've developed their users by focusing on remittances and this these immigrant populations that it fits in nicely, like this neobank could really become the

neobank for people who have to send remittances that they because they remittances, this just makes sense for the bank to use. So I think that's probably what they're going for. And I think it's an interesting opportunity. Yeah. And I would note that Wise has a very similar product as well. Almost the exact same thing. And it makes total sense to kind of turn that into a bank account for people. And it sounds like you officially have the LinkedIn edge, which is the tracking the job postings. That's good. It's smart. I mean, you can see like if a company is secretive, that's might where they'd be. And they are pretty open about it. Like a lot of companies are way more vague. Remitly, I guess, isn't worried

about why stepping on their toes or something. All right, Ryan, what do you got? I'm going to let you go first because I want to touch on your point after. So you're right. I have a second one. I have a second one, but. All right. All right. Okay. So this is a big one. I was kind of excited about seeing this. It's called Remittance for Developers. And I get confused. It might've been Remitly for Developers, but I think it's Remittance for Developers. Either way. It's Remittance as a Service, Remitly for Developers.

Oh, okay. So I got it totally wrong. But either way, you'll be able to find this if you want to look it up. It's a new segment that offers an API to allow businesses to hop on Remitly's platform and bring remittances and international transfers to their banking account or mobile wallet. I am not sure what the unit economics of this are, but I bet Remitly is either getting a take rate on all payment volume or getting paid whenever the API is pinged. It's going to be either one of those. And it seems like something that can grow very easily once something plugs and plays into it. Think of something like the Cash App or Venmo or whatever, something even bigger, like traditional bank accounts or something like that. Got this? I don't know if a traditional

bank account could do that, but something like Venmo or Cash App, that'd be huge. You'd grow your volume very, very easily. They have not partnered with them yet. This is a very early thing. But for example, Novi, which is actually owned by Facebook, is a digital wallet that uses a stable coin for cross-border transactions. And they actually have to use Remitly's API. They couldn't build this by themselves. So Facebook decided that it wasn't worth it for them to build this in-house and they had to outsource it. And they're only doing one corridor right now at launch. It's Guatemala to the United States and back and forth from there. So it's kind of in a testing phase, but if Novi really takes off, that could be a lot of growth

for Remitly, that'd be very easy for them to go after. And it's almost a hedge for someone, you know, like competitors coming up. It's almost like, no, you don't need to build your own thing here. You can actually hop on with us and we'll share the economics here. However, I did see a note on Novi's website, or I don't know if it's called Novi or Novi. It's N-O-V-I if anyone wants to look it up. But there was a note there that over time they want to transfer everything to diem diem which is the old libra cryptocurrency so i'm not sure if in the long run this type of thing is trying to kill remotely so a lot of variables there hopefully it's not too confusing a lot of made-up words um that people are launching things for all this stuff but ryan

what do you have to add to that yeah so i think uh just to kind of touch on it a little bit i think the api segment could be really really big if i'm understanding it right um this would offload the legal hurdle for new fintech companies which seems to be like the biggest part once again if i'm understanding this right it would offload the legal hurdle and it would enable cross-border payments so if you're thinking can't someone just do it themselves for reference venmo and cash app which are the leaders in peer-to-peer in the u.s in the u.s yeah they can't even do it aside from i think a single corridor that uh cash app has like you can transfer it to the british british pound or something like that. UK, yeah. UK to the US.

And so aside from that, I think, I mean, it seems like the problem there, if they aren't building it or if Facebook hasn't built it, obviously there are legal hurdles to get in. And so if Remitly can kind of help with that, that seems like it would be a big avenue, especially for new fintech startups. But yeah, aside from that portion, I think the name of the game is expanding within the existing corridors. I think they already cover most the globe. And so attracting new customers. And I think the best way to probably do that within existing corridors is the referral program. If they bragged about their lifetime value to customer acquisition cost, if the lifetime value is really, really high, I guess why not spend up

on that referral program and just attract as many users as you can? It's a pretty simple model. I don't think there's any, aside from the APIs and the possible banking products, I think the name of the game is getting as many customers in the door as possible. Yeah. And I would note that they have 1,700 corridors, but there's still a lot more that they can go after. Yeah. They have the big ones already, but there's plenty. I mean, they're definitely not at 50% of corridors. I don't know what that total number is, but it's still a lot higher than this. All right. Highlights and lowlights. Ian, what do you like and dislike about this business? For me, I really like the highlight.

Sorry, the pillar that they have of being mobile centric. I think that that's really important, particularly in the developing world where people don't necessarily have access to banks easily or physical locations, but many people with the rise of the internet and mobile phones, I think that betting on mobile in the developing world seems smart to me. I also like I read somewhere that they have higher revenue per customer than Western Union, despite having lower fees. And so I think that that's pretty impressive. And this this write up was kind of attributing that to being related to people just sending more money across Remitly than they do in Western Union and higher frequency of payments. And I suspect that that's probably because Remitly customers, I would imagine, are fairly sticky. If you're using Remitly, you're probably using Remitly every time. And I don't know this, but I would assume that if you're, perhaps, if you're using Western Union or something like that, where you're going in person to deposit or to send the money, that you're probably just going to whatever's closest, right? Whether it's a Western Union or a MoneyGram or some of these other players. So being a mobile app, they may have a little bit more retention of their customers and getting every single dollar that they send. A couple of lowlights for me is I think they are right about pricing.

They talk about how they can't just charge a high fixed percentage because people don't want to pay eight times more to send $2,000 than to send $250. It doesn't make sense to them that, oh, I have to like, you know, just because I'm sending more money, I have to pay this huge fee to tire. But because of that, that may limit growth potential a little bit as people sending higher, bigger checks doesn't necessarily mean that they're getting as much money as like players have traditionally gotten from higher checks. And so because of that, I suspect that fees per customer on the remittance side of the business will probably be capped at some point. And I'll probably get into that a little bit more later. Yeah. If you look at the cohort analysis on their S1, it seems like the existing cohorts don't necessarily spend more because you're not, I guess, you're probably not sending a whole bunch of more money to your family. You're not doubling your salary in a year. But it's stable. It seems to stick around. And once you've kind of found a solution, it doesn't seem like there's any real reason to change. But I'll get to my highlights. I think there's great branding. I think as obvious as this is, I think the name is good.

it's kind of more direct than money gram or or western union it's it's pretty intuitive solution especially if you're like a first time remit uh if you're sending remittances for the first time and then i also think they have robin hood like marketing with an actually helpful product so they use that referral program and they do some of those uh sort of what you'd call promotional activities that for Robinhood, you don't really like it, but when you have a product that actually helps, it's really not that bad. We've seen how well that marketing style can actually do if Robinhood's a good example. And then the financials check out as well. They don't seem to be spending an exorbitant amount. Obviously, gross margins will be capped because of the

transaction expenses, but there's a clear path to profitability. And then all in all, I think the business just in general passes with flying colors. I really liked the business model low lights for me. It feels like every business looks really good in their S1. And there's probably some low hanging fruit that still needs to pivot to a digital solution. So they can probably capture those, but it's probably going to be pretty competitive and they're going to have to win market share away from wise and uh money well the biggest is western union that's a number and western union so all i mean it's a competitive market uh and there's obviously people that are going after it the other thing there's two material weaknesses that were recognized on the s1 um

that i believe we're just like giving people access to i don't think they didn't say anything about material misstatements so i think it's those are it's not a big deal one yeah it was something around like they gave access to um financials to someone they shouldn't have uh so hopefully that's an easy fix yeah and the other thing i forget where i saw this but i believe 50 of companies i might be getting this wrong like 50 of companies that are coming public have a material weakness on their s1 so it might not be a huge deal but yeah just yeah the material weakness we really don't know what it is yeah that that's the big deal if they're like oh our income statements might have been wrong you're like uh-oh um shout out tattooed chef but um

the the odds of mine highlights and whites i agree with you guys uh the big thing for me is it checks off the durable and moat boxes so durable the industry is going to be around there's no reason to think that this is going to stay unless we go full-on um i don't know closed borders uh which is going to be impossible probably with how globalized the world is now and then the moat boxes get checked up to classic network effect here that is really hard to replicate um and then there's an easy path to growth if they can execute so they got the durability of the industry uh competitive advantage and there's a clear path to growth i also like the optionality within the remitly for developers uh idea that was only launched in

2020 so it's probably pretty early and it's probably not a big part of their business now they mentioned it on the conference call um maybe i don't know if they mentioned any sort of volume numbers with that but i do think it is a great idea uh for what it's worth for me as an outsider from from the company that could be big over the long term uh but we'll see low lights though the big one is it's hard to determine who the clear winner is in my mind among the competitors and that's not just western union moneygram and wise and zoom uh but also when i was reading up on Facebook's ambitions with Diem, it seems like that could be some sort of Trojan horse, but it also could be a benefit to their growth if they have to partner with them. I'm just

not exactly sure. I think if I'm thinking it through, Remitly or all these other ones would still have to be on the, say, Novi app that's powered by Diem because once you say the cryptocurrency or stablecoin that is basically interchangeable across borders, you still have to convert it back to your local currency uh so i think they would still have to use remotely but that's a risk there you know i think there's some ways that they could get disrupted by something like that i think there's something to be said that almost all these low lights have been non-company specific they've been mostly industry-wide that's true i think that's the big thing with all these companies uh is that sort of there's also the federal reserve not the fed

reserve but central bank risk if they kind of all partner up with a central bank digital currency could that make these uh type of businesses not really as important anymore maybe i'm not sure um and then just simple ones i have unproven profitability and no 10k that adds another way of annoying of risks that's pretty simple that i think everyone can understand did anyone look up the lockup period yeah it was 180 days uh so we're not at it yet can't be this winter was there a lot of should be in march basically was there a lot of private ownership and i would guess you saw it i would guess right i saw that table there was the vcs or whoever had a good chunk so i'm assuming i'm assuming we're on a low float type deal here so that's another thing kind

of just uh for the ipo always waits through the lockup period just in case um and it's not like a bet that the price is going to drop or anything. It's just there's a lot of historical evidence that that can happen a lot. So even if you like this company, that's a risk heading into the lockup period. But let's move toward these ending segments. Bold case. Ian, what do you think has to go right for Remitly to be a good investment over the long term? I think for Remitly to be a good investment, it becomes the bank and the financial center for anyone who sends remittances. I think they add profitable services to the remittance business, which ends up just serving as customer acquisition for a much larger business that they grow from about 3% share

of the remittance business to somewhere around 20% market share. Western Union, for reference, is currently at about 17%. And so if Remitly could really take a lot of that market share, and I think they've got some things going in their direction right now, I think that becomes a great customer acquisition tool for more profitable services. Yeah. It's an interesting note too that Western Union, I believe I've said this and I could be wrong, but I believe they're the number one player in this. And it's interesting that they're only at 17% market share. So it sounds like if it's fragmented, there is an opportunity for these mobile players to really go after that market,

even if they're not taking customers from Western Union or MoneyGram, where people are using kind of the, I don't know, less, it's more like black market type stuff where they're not going through these official channels. Once people get mobile devices around the world that are basically reliable and connected, that could provide more and more of a tailwind for Mittley to take that market share pretty easily. All right, Ryan, what's your bull case? Yeah, they continue to grab market share, as you just alluded to. It's a big market. It's a huge market. There are apparently 47 million immigrants in the U.S. alone. The bull case is, I think, pretty obvious here. If they get to 15 or 20 million active customers globally, they sustain their annual

ARPU, which I think was like $172 a year. Don't quote me on that, but I believe it was. And then they add on any growth from APIs, the business is going to be much larger than four and a half billion. I guess you could work out the math if you want, but I think there's a path to i think there is a path to 20 free cash flow margins um yeah maybe yeah not going to be much higher probably though no it's it's probably where they're about at scale um and if you're doing 15 or 20 million active customers at 172 i think it's like 4 billion in revenue could be wrong on that but it's uh i think there's definitely a plausible bull case here And it's better than what the company trades for today.

As someone who owned Square in the past, who knows that business well, but doesn't know it as well now, I think this seems like a way better acquisition candidate than Afterpay at $30 billion. But I guess that's a debate for another show. It seems like this sort of asset would be really sought after by some people, but we'll see. I wonder if there's legal hurdles to acquiring a remittance company. That could, yeah, yeah.

There could be. There could be. I'm unsure. We'll point these questions back to Luis Sanchez. He's an expert in this type of stuff. So if you have any questions, we might be asking him about it too. All right. I'll have my bull case. I say volume customers and revenue both durably grow at about 20% to 30% rate over the next five years, which is a significant slowdown from where they're growing right now. So I don't think the market doesn't seem to be pricing in that 70% to 100% growth that they've been doing. I think their CAGR from 2015 to 2020 was 90% or something like that. So super impressive, but where it's priced at now, it doesn't seem like you really need to expect that high. At a price to gross profit of 20 or above 20, you got to be confident

that the growth is going to continue, but I don't think you have to be confident that it's going to be some sort of quote unquote hyper grower that's really grown at like a 50% rate or something like that. And then on top of that, they create a better and different experiences for all parties with the stuff that we outlined above. The API stuff, lending, financial services, stuff like that, that could lock in customers even compared to some of the other competitors that may have more of the physical footprint. They don't have the developer set, say someone like MoneyGram and Western Union. The argument against them versus their moat may be that they don't have the software development expertise compared to someone like Remitly, who's headquartered in

seattle the second biggest or whatever maybe the second or third biggest city for like software development stuff like that uh but yeah let's move to bear case ian what could go wrong here i think that what goes wrong here is that this turns into a commodity remittance um the remittance business and the remittances just like trades became free in the united states the remittances eventually become free and uh the global fee free option emerges whether that's everybody doing it or whether it's one company that really takes over and that that kills Remitly's business before they add any additional services

or before they capture a large enough market share to really build a sustainable business. I think that's, for me, that would be the major bear case that it just, this moves super fast towards free transaction fees and, or no transaction fees and that Remitly just can't respond fast enough.

Yeah. As I say, it almost bears a resemblance to like the stock trading fees, like commission fees on stocks, like is it a battle to zero? But at the same time, yeah, sorry,

I guess I'm just copying your statement, but if they, the problem is then they got to make money somehow and it's probably on the currency spreads, which just feels like a backhanded way of, you might as well just give them the fees anyways. Yeah, it seems

like the ABI stuff, Yeah, it's not that different than Robinhood, I guess, but the API stuff could be a hedge against that because if this becomes pretty easy for almost anyone to do, if Remitly is powering that, they may not necessarily get a take on the volume, but they could just get, you know, whatever a fee like Twilio does whenever the API is hit. All right, Ryan, what's your bear case? so sort of similar to ian's either competition minimizes remitley's ability to grow or the legal hurdles come down and remitley's value to immigrants isn't isn't quite as high it seems like the legal hurdles i don't think there's a path to that going down i don't i don't think that second uh i don't think that second point is that big of a concern honestly um this This is an industry that's grown at, I think remittance volume has grown at 5% a year for

the last decade. I see that persisting. Yeah, I think they said 4% or something like that, right? Yeah. I don't think there's a huge bear case. I guess there's always the risk when you have, especially a new IPO, that growth decelerates faster than people expect. And that already happened.

There's multiple compression. Yeah, that already happened on that last quarter where they got hit a decent amount. So I guess, I mean, yeah, the quarter now looked that bad to me, I guess the, uh, I mean, eight and a half percent sequential customer growth seems like a big, I mean, that's solid and I don't know, 450 million guiding for 450 million in revenue. That's like, I think it's a 70% increase year over year. I, yeah, I think the bear case is somewhat limited from the business point of view. Yeah, for sure. My bear case, I think there's probably three in my mind. I think the competition from Wise, MoneyGram, and Western Union make it tough to gain market share versus

the established brand because there are the switching costs. People stick with these companies. MoneyGram, and I believe Western Union as well, but MoneyGram is basically trying to copy with the app. And if that's basically the same, they'll have an easier time attracting their existing customers. So that can help them grow faster. Wise seems to be the dominant player. There's different types of customers people serve. There's kind of more wealthy customers and the poorer customers. So I don't know if Wise is going after a different market opportunity than Remitly, but they seem to be the leader, I guess. Remitly is not that far off from them, but Wise is going to be a big competitor. They seem to have some great products coming down

the line, at least from what I was reading when I read their S1. Then the other bear case is kind of cryptocurrency in general but i i feel like i would fade that at least at the moment because they already have the crypto partners for remitly for developers so it shows that at least currently the crypto companies need them also are good right also if you think like well why doesn't someone just convert it to convert money to bitcoin and then well the fees are higher yeah take it out you're either going to get high commissions and i believe it takes time to get that out of uh most of your whatever wallets or where exchanges exactly uh and it doesn't have that peace of mind that they're so um yeah and yeah yeah the crypto could swing wildly in value

and that's why i think the biggest competitor or biggest looming risk is the stable coin dm um maybe not tether after we did that episode that shows maybe tether is uh you know uh could be a house of cards, but I'm not confirming that either way. But DM from Facebook, which was Libra, that probably poses the biggest threat to me. If you have a stable coin that's legit, I don't know if that could dominate and kill a lot of this business. It also might not. So who knows? All right. More or less interested, Ian, what are your thoughts? I'm slightly less interested and this is a little bit unfair, but I just want to see a couple of quarters with this one. I kind of want to see where they're going, how management responds. The stock, as you alluded

to, the stock is down about 50% off of its high. It's basically been just going steadily down since the IPO, at least at the time of this taping. So that does get me a little bit more interested as we get to some fairly reasonable valuation metrics as you talked about, but I'd just like to see a little bit more time on this one. I think it's one that I'll follow and could become more interested in at some point though. All right, Ryan. I'm a hundred percent more interested. I really like the business i really like the industry for some reason it seems like remittances don't get nearly the fintech premium that other areas do um and it doesn't make sense to me because it seems like a super durable area for me um yeah yeah the and it's modi uh yeah this is actually if you will go

the the number one the google talk that pat dorsey who's like the the king of describing modes over at morningstar i believe he did a talk at google and he goes through all the different types of moats and he used western union as an example of a classic network effect that is underrated and hard to hard to disrupt so you know you love the money businesses yeah um so yeah i'm more interested but as with any ipo i i wait until after the lockup i i kind of have a hard rule on that so that's the only thing holding me back and the valuation is still obviously it always feels like you want something a little bit cheaper but it's not uh remember this isn't going to be a business that has 50 free cash flow margins so not all sales multiples are equal um yeah 10 times

sales is not true yeah it's not the same as facebook or something like that uh or adobe yeah it's definitely a premium valuation but i'm more interested um i do like the durability of the industry do like their competitive advantage uh although versus the competition uh the big four I guess there's not really competitive advantage versus them, but versus anyone that's trying to get into the industry. I think there is. I love the API for developers thing. So I think, yeah, it's going on the watch list.

Definitely going to just wait. I don't know. It's tough to wait. You know, it's always tough to wait after the IPO because you research something, you'll like it. And then you're like, all right, I don't want to forget about this thing. But I think forcing that is important.

I mean, things pop up. If you remember that toast one, what we covered, And we said the lockup period is about the end. Wasn't there that note that 88% of the float was unlocking? I mean, the writing is on the wall there that you're going to get a better buying opportunity. It may not happen for Remitly, but you just, I like to wait for more earnings reports, more SEC filings, see what the 10K does. I don't know, but still really interesting business.

All right. Stock for next week. Ian, it is your choice. What do you got for us? Next two weeks. I think we should go with, I think we should go with, yeah, two weeks from now, but I think we should go with wise and complete the set or the trifecta.

I think, like you mentioned, from what I know, wise does target more affluent customers. So I think it's a little bit different target market, but I think it'll be an interesting one to look at. Yep. And they're based in Europe. So I think it's more Europe centric as well, but yeah, that should be a fun one. They just want public as well. So it should be fun to look at. All right.

That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time. This family is on the brink of civil war.

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