Chit Chat Stocks - Why I Am Buying This Hidden Fintech Stock (Remitly, Ticker: RELY)

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Starting point is 00:00:44 The new bond account only at public.com forward slash chitchat stocks. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome to chit chat stocks i am one of your hosts ryan henderson and i am joined as always by the one and only brett schaefer and today we have one of our monthly individual stock research episodes and you may have been able to guess it by the title we are talking about

Starting point is 00:01:38 remitly brett is has done a ton of research on remitly here and he's going to be diagnosing or discussing the business model, the opportunities in front of it, and whether or not he thinks it's an actionable or investable opportunity today. But before we get into that, Brett, let's kick it off with how you discovered the idea because I always like figuring out how investors find new opportunities. What inspired you to research remotely? Well, thank you for that lead in. I should say one of them was your episode on wise, which we did, I think a few months back, definitely sometime in 2024. So go check that out. It's not necessarily a direct competitor to Remitly, but it is one of the most similar companies to them. And it's done quite well. Ryan owns it.

Starting point is 00:02:26 Ryan did a research report on them. Check them out if you're interested in this company. Very similar and could be something you're interested in as well. Before we get to it, I want to say there's going to be some charts we talk about on this episode. We're going to screen share probably on YouTube and Spotify for the video feed, but there will also be a free newsletter that's associated with this subscribe on in the show notes it's the chit chat stocks sub stack you can check out if you're listening to this and you're like okay well what does the visualization look like on that chart okay i can just go to that newsletter pick it up super easy do it on your phone do it on your computer but yeah what inspired me to research

Starting point is 00:03:03 remitly well one that episode that ryan did but second i think it was a few weeks ago now maybe two weeks ago, there was a thread from an investor who's named Mario Sabelli. And he just outlined the business case for them growing for a long, long time and why they can have increasing and a growing competitive advantage. So I decided to research myself and we'll see if I agree with the conclusions. I respect Mario as an investor. So I thought, hey, if he likes it, maybe there's something to check out here. Obviously, you always want to do your own research. You can't just read a tweet thread and go super long into a company. But he says that Remitly has a chance to be the booking.com of the remittance space. And using this analogy, Wise might be the Airbnb. Booking.com

Starting point is 00:03:53 has posted a 24% CAGR for shareholders since 2002 after the dot-com bubble implosion. And Remitly currently is in a 72% drawdown since going public in 2021. Since 2019, revenue has grown at a 61% annual rate. I think those two facts really warrant an investigation into the business. You have a stock that has totally collapsed and you have revenue that keeps growing and growing and growing. We'll share some charts on that as well. But Ryan, is that a good tease? Hopefully investors are, or excuse me, listeners are a little excited to hear about this business and why it could be a promising investing opportunity. Yeah, I think anytime I find huge drawdown coupled with great top line growth, I know it's a little simplistic, but I kind of like that setup

Starting point is 00:04:43 because if they do figure out the profitability side of things, or maybe it's just taking time for them to get to profitability, it can certainly work out. So before we get to some of those numbers and the economics and whether or not we think there'll be a cash flowing machine in the future. Let's talk about the history. This is a... I've already read the history because I read your notes, but it's kind of similar to Wise in terms of how it started. So why don't you give a little background on Remitley's business? Yep. Classic VC-backed company. There's always the narrative here. And Ryan, if you want to see any of the charts here, go ahead and share them as I'm talking. So Matt Oppenheimer was working in Kenya when he noticed how frustrating it was for locals

Starting point is 00:05:29 to receive money from out of the country. They had to pay a ton of fees, they had to pick up cash at various locations, and they risked robberies when picking up the money. There was a ton of friction and danger in the process. As a younger person who worked at a bank, which is Barclays, Oppenheimer thought that smartphones and digital technology could help improve the remittance market. Thus, with two other people who are Josh Hugg and Shabazz Gulati. Apologies if I'm not pronouncing that correctly. The idea for Remitly was born in 2011. It is currently based in Seattle and has followed a fairly typical VC-backed path. It began by focusing on a few corridors. Note, when I say corridor, in remittances, that means a specific country-to-country connection. So,

Starting point is 00:06:12 these were three corridors at the start. I think they went one at a time, but these are the three main corridors today even, and the three ones they focused on at the beginning. And that was Philippines, India, and Mexico from the United States. So those are three separate corridors. So US to India, that's one corridor. US to Philippines, that's another one. US to Mexico, that's another one. And there are, well, how many countries are there? About 200. So I guess technically there's about 200 times 200 corridors. What is that? 40,000? Maybe I'm missing a zero there. I think you're doing the math right there. Yeah. There's a lot of corridors. Right now, they offer like 5,000, but as listeners might expect, there are some main corridors out there

Starting point is 00:06:56 like US to Mexico and US to India, which is why they focused on that. And these are three of the largest corridors where young professionals, which I would call digital natives in the United States, are sending money back to their family or friends in other countries. Remotely targeted these cohorts of people who wanted a seamless way to send money back to relatives while also giving them flexibility in pickup options. Not everyone is cashless back home. I think there's more on that later. That's important to the story. Today, it is the largest US-based digital remittance company competing with the likes of Wise, PayPal, Western Union, and banks in remittance payments. I should say the definition is probably a bit specific because it doesn't

Starting point is 00:07:38 include wise because they're European and these are all kind of global companies and that it doesn't include PayPal because it's not a, they're not specifically a remittance company, but I guess, you know, the, the, uh, what would you call it? The, the specific remittance companies, they're one of the largest by far. Now over the last 12 months, send volume was $46 billion and has grown at a 51 and a half percent annual clip since 2019. So it's gone from $7 billion in 2019 to $46 billion over the last 12 months. Management now estimates they have 2.5% market share in remittance send volume compared to zero a decade ago. I think one of the big questions we're going to talk about on this episode, can they get to 5%? Can they get to 10%? What is

Starting point is 00:08:26 going to stop this growth and what is going to slow it down? I think that's some good background there. The growth is astounding. And it seems like the growth even picked up in the last quarter, at least in terms of revenue. Yeah, I think there's some seasonality. So if you're looking at the quarter over quarter stuff, say from our friends on FinChat, there is some seasonality. So trailing, it might be the best method. I think around the holidays, there's some times that pick up. And then at the beginning of the year, there isn't. And I think maybe in the summer, people are sending more money, but who knows? All right. Well, let's talk about what Remitly actually does.

Starting point is 00:09:05 I think we've kind of alluded to it throughout the start of this episode, but what is the actual product? Why do people use it? And who are kind of the typical users? Yeah, so when you're looking at a company, you can outline all these things like revenue growth. You can outline send volume growth,

Starting point is 00:09:22 but I like to identify why are people either beginning from a greenfield opportunity or switching to a product like Remitly. And Remitly's offering today is very simple. It lets people send money cross-border on their phones. And importantly, and again, this is the biggest difference between Remitly and Wise, the company allows the receiver of money, who I'll call grandma back home, to receive it in a variety of methods.

Starting point is 00:09:49 This could be cash pickup, digital, or in some cases, even cash delivery to their homes. And I think that's probably in markets where there's risk of robberies and stuff like that. Here's a quote from a review on Remitly. Quote, senders in 30 countries, including the US, can transfer money to recipients in more than 170 countries. Depending on the country, someone can send money via methods such as debit card, credit card, or bank account. Money can be transferred to more than 3,000 banks and over 460,000 plus cash pickup locations,

Starting point is 00:10:20 and cash might be available to a recipient through mobile or home delivery. So a digital native in the United States or in other countries, I guess there are more and more corridors opening up every day, they download the free Remitly application. They then connect a bank account or debit card, which is the funding method, and send it to the corresponding location in the other country. And the location would be some sort of financial, personal finance app or bank in the home country that who I'll call again, grandma can pick up or download or pick up his cash, however you want to do it. At its core, there's really nothing special about the remittance business.

Starting point is 00:11:00 You simply have to follow the steps to get your business set up with the appropriate licenses, bank account partnerships, and the corresponding technology. So why did Remitly win over other startups? Because I think it focused, and this is what they talk about, so I'm really stealing what they say, on what customers care about with remittances. First, they care about trust and reliability. Oppenheimer, the founder and CEO, repeatedly says that a brand is a promise to a customer that is repeatedly delivered. And I think that is a great mantra for a remittance company. If you are sending $1,000 from the United States to grandma in India, you do not want this money to get stuck, lost, or stolen. I mean, that would be a terrible outcome. And I think that NPS score

Starting point is 00:11:42 would be quite well. Yeah. And think about it from this customer's perspective. Do you care more about having the absolute lowest possible fees when you're sending a thousand dollars back to your grandma or do you care about them being able to safely pick it up or safely receive it and you're willing to take well you know maybe not the absolute lowest fees but still lower than the alternatives while knowing that you can trust they're going to get receive the actual payment yep and that comes to i'll say this one this is my third note but they have lowered fees versus the legacy players, but not necessarily focused solely on cost. They want to provide the best value for customers, which is someone in, say, the United States sending money regularly to

Starting point is 00:12:27 someone else abroad or the United Kingdom or even like, say, South Africa to Bangladesh, something like that. Now, for anyone who follows Wise after our coverage on that show, I would note that the companies do not overlap as much as you think. Wise began in Europe and is focused on richer consumers sending digital only remittances or going beyond just remittances to international personal finance, and that's why their take rate is lower. Now, the third reason that I think Remitly has succeeded is they focused on specific corridors to perfect the product for that corridor over time. Each country will have different cultural norms when it comes to banking and payments. So Remitly tailors its business by setting up local marketing, banking partnerships,

Starting point is 00:13:09 and payout partnerships that are important for both the receiver and the sender. And this makes the customer experience that much better. To stereotype it, Wise is going after the digital nomad who lives abroad, and Remitly is going after the immigrant tech bro sending money back home. I think that's a fair way to try to classify. Obviously, that's not the only people that are sending it, but that's kind of the core cohort that they're targeting. Now, we don't have anecdotal evidence that we're not sending money abroad, but I told Ryan and I tried it myself to download the app and almost do a hypothetical transfer. And Ryan, I'm curious,

Starting point is 00:13:46 you obviously didn't send money to a random account in India, but how'd that process go? Did you understand the app? Would you, do you think you would be able to send money through them without contacting customer support? Yeah, I, you asked me to sign up for the app right before the episode and I did that. And I was like, kind of reluctant to do it at first,

Starting point is 00:14:05 to be honest, because sometimes you do this And it's, frankly, a pain to approve the bank, do all this stuff, approve your account, make sure it's accessible, all this stuff. Remitly was honestly super quick, very intuitive. I thought it was actually a lot more intuitive than Wise, which I'm a customer there. At least for remittances, you mean? Yeah. And that's their focus. Just sending an easy payment, yeah.

Starting point is 00:14:34 It seemed very, very easy. And the different receiving options, so whether you want it in a mobile wallet, whether you want it to show up at a bank, whether you want it to show up as cash for receipt, were all just one click away. It is very simple to choose what you want to do. So, yeah, I thought it was a very, very intuitive app, and it seems like anyone could probably download it and get up to speed pretty quickly. Yeah. And there's a lot of things, again, we're going to use probably India as an example, because that's one of their largest markets. But replicating that, I think, would be quite difficult, especially for someone that's not focused on this niche. I don't even think Wise wants to do this, where you have to get all the local pickup locations, all the local languages,

Starting point is 00:15:23 all the local banking partnerships and regulations. That's just tough. And that shows, I think, why they've won in these corridors, is because they focused on just a few corridors instead of at the beginning say, oh, we're going to have all these corridors. We're going to replicate Western Union. Maybe they were a bit smarter and that's why they're growing quicker. Yeah. Here's the other thing is it really is not, Wise is not a great direct comparison, but Wise for the most part, it seems they want to keep the money on the platform and be sort of an all-in-one solution. Whereas Remitly is just addressing a pain point in the remittance market And they're doing a really good job of that. And you can see the impact that it's having and the adoption that it's getting because they're keeping it simple, address the pain points for customers and make it a very intuitive solution. They've done a really good job of that.

Starting point is 00:16:15 Yeah, like no one's going to switch from Wise to Remitly or even use Remitly probably at all to send money from the U.S. to Canada or the U.S. to the United Kingdom. But for a place where it's, you know, like there's not everyone's not really a digital native. It really works for Remitly, I think. And there's all the complications when you get to different countries with a lot of different cultural norms. Yeah, I think that sums it up for why they offer it, why they've grown their customers at such a fast rate. All right. Let's go through the company's business model. How are they growing? What are the unit economics here? Yeah. I'll say again, there's a lot to like, but at the end of the day, the business model

Starting point is 00:16:57 is pretty simple and easy to understand. They take almost all of their revenue today, I'm guessing over 99% comes from cross-border payment fees. It simply takes a cut of every transaction sent on the network. So to calculate a take rate, I take the revenue and the divided by the total payment volume over a period. Over the last 12 months, I have a take rate of 2.35%. In 2019, the take rate was 1.79%. So I guess over 2% is actually trended higher. You might be concerned about this. You might, you know, you might be asking a question that this is a bit high for a remittance disruptor compared to the Western unions of the world, you know, isn't wise at a sub 1% take rate. Actually, I should confirm that Ryan, I believe it's at like an average of

Starting point is 00:17:39 0.6, something like that. Is that correct? On average, yeah, 0.67, I believe. Yeah. So that's a concern that makes sense. It's logical. But remember that Remitly is offering cash pickup and other solutions that are more costly, but improves the customer value proposition. This is why volumes are growing so quickly, in my opinion. If it's solely focused on digital transactions, well, it might have a lower take rate, but then it would be compressing It's a dressable market and probably not improving the customer value proposition where let's say I'm someone who lives in their host city, Seattle, and they want to send money back to India, but grandma, who I'm going to say every time, only wants to pick up something

Starting point is 00:18:21 in cash from a specific location. Well, it's more costly to do that. You're going to have to pay a higher fee, but if that's the only way to send it, well, then you're not going to become a revently customer. And if they can build that trust, then eventually, you know, maybe everyone goes digital. and as I wrote here in the report, over time, Remitly likely becomes entirely digital or the vast majority digital as more and more of the world just embraces smartphone payments. As this occurs, I would hope they lower fees for customers, but it's definitely something to track.

Starting point is 00:18:49 I don't think it's a giant concern because it's not necessarily only about the take rate, but about the all-in value. All right, anything on that before I get to the income statement? No, it makes sense. Let's run through the costs. What are kind of the biggest cost centers for them? And then how have margins trended over time? Yeah, so I think this is important stuff. And I know in audio format, we don't want too many numbers.

Starting point is 00:19:13 So I'll just say that you have transaction expenses, which is just payment processing and the stuff they have to pay for sending. And that was 40% of revenue in 2022, but dropped to 35% of revenue in 2023. And then they have customer support costs, which have dropped to about 9% in 2023 compared to 10% in 2022. So you subtract those out of revenue. I have a gross margin of 55%, including customer support. That's not bad. I think it probably improves slightly, but there's not an absolute ceiling. This is not some software business that's going to hit 90% gross margin. And yeah, with those gross profit dollars, they're, as you can guess, spending a lot of money on marketing

Starting point is 00:19:55 25% of revenue goes to sales and marketing right now. That was $234 million total in 2023. And then it spends a good amount on technology and corporate overhead costs. I have in 2023 technology development, 23% of revenue, GNA expenses, 19% for loss from operations of 12% of revenue. So a negative 12% operating margin that has begun to improve. And I think Remitly's leverage will mainly come from slightly scaling gross margins even more, and then lowering technology and corporate overhead costs as a percentage of revenue. And given what they say, given just what you kind of look at with this business, they're going to maintain high marketing costs because they want and they think they have a high runaway to attract new

Starting point is 00:20:41 customers. Like I mentioned before, operating margins are negative, but they are moving in the right direction. And if I do a bit, say rough math, gross margins eventually hit 60%. Marketing stays at 25% of revenue and tech and overhead costs both drop to 10% of revenue each. That is a 20% positive operating margin. Sounds about right to me. And I guess we have another section on here about how they're trying to grow. But what are your thoughts here? Any concerns about my estimates for the income statement? No, you showed it there, or sorry, I screen shared there, and you can see the operating margins were kind of negative single digit percentage in 2021. However, it's worth keeping

Starting point is 00:21:30 in mind that the company went public in September of 2021. So you saw operating margins decline throughout 2022 they raised a ton of cash it would make sense for them to go out and invest that in marketing spend assuming that you know they're seeing the return on ad spend and so if you look at the sgna sales general and administrative which i'm just looking at this here on uh yeah marketing plus third tech and overhead costs it's it's grown it's almost tripled over the last three years. So you would expect that to happen given that they had all that cash and it would be kind of boneheaded not to invest it as long as they're generating good return on that spend. So operating margins have improved all while they're still spending more money.

Starting point is 00:22:19 So it's always nice to see that set up. We're going to talk about where we think that can go. But let's talk a little bit about the growth algorithm. I guess one question I have for you before we get to the growth strategy what is the biggest cost of revenue line why is it only 50s i i think it's the you know cash pickup stuff you have just expenses around the processing right well like same with why where you have to pay the local whatever it is the banking partners whatever and i know wise has been very very innovative on trying to circumvent all those costs. Remarkably, it might not be as good as that, but I think that there's still some room there. And then customer support's 10%. Hopefully, that can get automated more over time. Maybe

Starting point is 00:23:07 there's an AI benefit there. They've talked about trying to improve that. But given the complications of some of these and the fact that if something goes wrong with a $10,000 transfer, that could be a big concern. I think customer support's always going to be there. Yeah, that makes sense to me plus it's gone from looks like 50 to 60 over the last four or five years roughly in terms of the gross margins um let's talk about the growth algorithm what are they doing like the growth has been astounding we're talking about 50 top line growth over the last five years annually why what's working for them i think one they have a good product and they market with a very, very smart marketing muscle. Active customers have gone from 1 million to 6.9 million

Starting point is 00:23:56 in five years. And this is a ton of market share that they've taken from legacy players. They have 2.5% market share, and there's a lot of room to run, and they're going to spend more on the growth marketing playbook. It's pretty simple. Spend marketing dollars efficiently, tell your customers about your improved remittance product, give them incentives on some of their first transfers through no fees and stuff like that. And when they start using your remittance product, they become a predictable revenue stream. Customers are generally sending money back home on a schedule.

Starting point is 00:24:29 And then the marketing dollars are all up front, are mainly up front. So then they get recouped quarter after quarter as people just keep sending money back home. Now, Sibeli, who had that tweet thread, which I will link in the sub stack, says that, It shows the comparison to Booking Holdings given Remitly's high spending on marketing. Here's the quote. Over the past 15 years, Booking's marketing expense as a percentage of revenue increased by about 50% while its operating margin about doubled. Importantly, ad spend was up something like 17x over this time period.

Starting point is 00:25:06 This took a lot of oxygen out of the room for competitors. This type of dynamic is what's most interesting about Remitly long term. With its rapidly increasing scale and superior product offering, can the company press the accelerator on marketing and accumulate a commanding share of the rapidly growing digital remittance space? That's a pretty good question right there. That'll get you thinking. Now, if you think this is just spending money on Google search, it's not. They've been pretty smart about campaigns tailored to local regions in the United States. For example, they target Hispanic-focused remittance billboards in places like the Miami

Starting point is 00:25:41 Airport or on the West Coast or places that are tech hubs. They'll have something that's more India-focused or South Asian. And I think it shows the focus on the details that makes them better. Is Western Union doing any of this? I don't think so. Is your bank doing this? No. And they're pretty good at getting this marketing for the corridors and for the cohorts that

Starting point is 00:26:04 they want. Cohort might be the wrong word. the demographics, the type of person that they want to get on Remitly and that they think has a very strong lifetime value. Yeah. A couple of things there. First of all, active customers, I was showing it there. I don't know if Brett mentioned the specific numbers, but a million customers to roughly 7 million customers in five years. And it really isn't slowing down either. It's doubled over the last two years as well. So still 50% annual growth in there. obviously that will have to slow down over time but it's a huge opportunity to go after and then

Starting point is 00:26:37 yeah you talked about the marketing spent i watched a lot of soccer uh and they have a huge sponsorship or partnership with lafc which you could imagine is going to be a huge yeah the mexican americans uh that are sending money back home a lot of them a probably watch soccer because they're fanatic about football down there. And B, there's tons of them in the Los Angeles area. So yeah, very localized, smart marketing. And it's no, it's not just Google AdSense dollars, which is nice. It is. Although that helps. That is definitely something that helps because again, this is why booking and booking was one of the largest spenders on Google AdDollars and still is i don't know maybe you can even do it live ryan search remittance app and see what pops

Starting point is 00:27:30 up on google i'll do it right now yeah my first ones are that google play and apple app stores for remittly no sponsorship so i think that's pretty good seo right there let me see if yours is the same hey there we go beating western union huh i did remittance app sorry i'm on uh i'm on mute there let me look up one more sorry in advance there's gonna be some typing noise but easiest way to send money to Mexico? Yeah, do Mexico. That's a question I would ask if I was trying to figure it out. Boom. Sponsored listing right there. Top one. Yeah. So this is what Sibeli is talking about. When you have the scale, it allows you to spend a billion dollars on marketing and retain that top spot and you still have a great lifetime value, but none of the

Starting point is 00:28:29 competitors can get that toehold in there. And that's why booking has been so dominant over the last 20 years in the, what is it, accommodations and hotel booking space. This episode is brought to you by our friends at Yellow Brick Investing. Yellow Brick is the best aggregator of stock pitches across the internet. By tracking thousands of blogs, newsletters, fund letters, podcasts, and more, they collect and summarize the best stock pitches and bring them to you in a single place. Try it for free or upgrade to a paid plan to see investor returns and the latest stock pitches on joinyellowbrick.com slash chitchat. We genuinely use Yellowbrick every single week here for stock research on small and micro cap ideas and think you can as well. Try it for

Starting point is 00:29:14 yourself. Simply go to joinyellowbrick.com slash chitchat and search a company or ticker you're interested in. You are bound to find a great report on just about any company. That's join yellowbrick.com slash chitchat if you want to earn a 6.9 yield for the next four years or more you need to check out the bond account at public.com it's a new way to invest in a diversified portfolio of bonds and receive monthly interest payments the best part if you act now you can potentially lock in a 6.9 yield until 2028 that's the new bond account at public.com forward slash chitchat stocks. Okay. One of the most important questions that we constantly look at and something that I think we have both grown to prioritize more and more over time, do you trust management?

Starting point is 00:30:08 Yeah. I like Oppenheimer. He's ambitious, but not one of those VC-backed founders where you start rolling your eyes when they talk. I think that risk is low. It's not Adam Neumann. they've executed. They've done well. They have good unit economics. They have improving income statement. If we look at his stake, he owns about 7 million shares worth around $100 million. It's about 3.7% of the company. Josh Hugg still owns a good amount, but I think he's not affiliated with them anymore, although he might be. I can confirm that. I think $100 million might be the sweet spot for an executive incentives. He does not have so much wealth where it's not a factor if Remitley blows up, but if Remitley does go bankrupt or something like that, he is not set

Starting point is 00:30:53 up for life. And this is probably the majority of his savings and just his financial assets. But he still has a ton of skin in the game. I think he's plenty motivated to have Remitley succeed. If we look at their executive compensation metrics, actually keep it simple, but it's kind of meh. They don't give bonuses or complicated payouts, but on the other hand, they do a lot of RSUs that aren't tied to any performance. So that's a bit much. And I would just track and see if they're just gifting a ton and ton of RSUs to the board and the executive team without good performance. Now, the performance has been great, so I'm okay with them getting compensated, but it's not a red flag. Could the compensation be improved where

Starting point is 00:31:32 they target like send volume or profit margin target or something like that? Yes, but it's not a red flag to me. Ownership table, also not a huge concern. They have a big investment from NASPERS, I think, or I can't remember. NASPERS process, they have those complicated ownership structures where, remember, it was the way to invest in Alibaba or something like that. It was just some South African holding company, but they also are an investment company and they own a big stake here. But I think more importantly, Oppenheimer seems to be on a mission to transform international money transference. He wants to win market share in this space and has proven the skills to do so in the past. I trust him in that regard. I think they need or he needs to and

Starting point is 00:32:18 the team needs to probably earn more of my trust over the next five years if I'm going to be a shareholder because I haven't been following them forever. They're a new company to the public markets and it's not the same as say an Amazon that has been doing it for 25 years. yeah i think you are right though this is really kind of the sweet spot to be in you've got a business that has a ton of momentum you have the money now and the resources to invest aggressively but you as the ceo you aren't i mean 100 million dollar net worth obviously that's fine uh it's tied up in the stock it's tied up in the stock it's tied up in the stock and the other thing that's maybe worth mentioning he probably lives in seattle uh you're around a lot of

Starting point is 00:33:07 tech people um real estate is not necessarily cheap here there's still like the motivation is all still there yeah if he goes bankrupt or if remitly does really really poor he's probably going to be just well off but he has all the motivation in the world to do well and there's no dual class share structure here the everyone has the same voting rights so i like the setup and like you said like if this company were 20 years older and they were the leader in remittances already they probably got some mercenary ceo they've got some guy who maybe he's got some decent incentives on the proxy statement but it's not he's not quite as motivated as oppenheimer would be today yeah and i also would say they might be in the sweet spot of executive age

Starting point is 00:33:59 early 40s typically like i hate to be just saying a specific age is better but i think that 40 to 60 year old age is the sweet spot of not someone that's kind of oh i might be around for a couple more years and then retire versus someone that's young and inexperienced yeah that's very true okay uh i think that covers management pretty well i guess is the stock cheap yeah this is the fun part, financial projections, again, keeping it simple. I'll go through some assumptions for remittance and why I think they're reasonable. There are actually, you know, from a payments volume perspective, there are a lot of tailwinds and headwinds that can materialize here, or maybe if you even go down to revenue, there's even more. So if we look at analyst expectations,

Starting point is 00:34:44 I saw remittance volume expectations of about 5% to 10% growth over the coming years, which would be total around the globe. I think this is a good assumption that makes sense if I'm just thinking from a common sense perspective. You have one, inflation, two, GDP growth, hopefully, around the world, and then the growing number of immigrants and global citizens sending money to another country. I think this can provide a 5% durable growth tailwind for Remitly. Now, second, I expect them to keep gaining market share due to one, it's proven strategy and customer acquisition. Second, gaining more scale and word of mouth. Three, big banks don't care about this small part of their business that has a terrible customer experience so they can

Starting point is 00:35:26 steal customers from them. And then Western Union, MoneyGram, and other legacy direct competitors are facing an innovator's dilemma and have technical debt. And then fifth, digital remittances keep taking share. So there's a lot of tailwinds there for them to take market share. However, I do expect the take rate to come down, or I would actually hope it does, which will be a headwind to revenue growth. And I think if you add and subtract all that together, I believe a revenue growth assumption of 20% makes sense for the next five years. Now, that's probably the biggest assumption you have to make. So Ryan, do you see any red flags? Am I getting too ambitious on one of these things? Because honestly, I thought this was the number where I wouldn't

Starting point is 00:36:09 be surprised if it's a little lower, but I also wouldn't be surprised if it's higher too. Yeah, it's pretty hard to forecast with any of these businesses that are growing really quickly. In Remitly's case, they've been growing 50% on the top line for quite a while. So it seems like a revision down, but obviously growing at that pace is not sustainable, at least over the long run. So 20%, I think it's fair. Obviously, anytime I've worked, Like for me, anytime I feel like I have to forecast out 20% growth in order to get a good return, I'm concerned. But in this case, 20% growth, you're getting a great return.

Starting point is 00:36:51 You could probably do well even on 15% growth, at least through 2030. So it seems fair, it seems doable, but like you said, there are some things that kind of buoy it here that keep the floor high, which is it's inflation protected. So as inflation grows, the send volume will naturally grow as well. So they're benefited by that. And then the customer adoption has been really strong. Do you think there's any sort of a network effect here? Is there any benefit?

Starting point is 00:37:24 Like the more customers that are on the platform, do you think they kind of sell the service for other customers? Yeah, I think so. One of the classic network effects that is talked about historically as a case study is Western Union. I don't know if digitally it replicates though, because does it matter if you're someone that lives in the US and has family in India, does it matter that there's a node that goes to Japan or South Korea? I don't necessarily think so, but I think there's economies of scale. We'll get to the

Starting point is 00:37:53 moat discussion, which is tough for a fast growing business that's really early. So no, I don't think there's a network effect maybe yeah the other part is if it if it were like venmo where you need both people to be on the platform then it would be there but since the sender can send it to a bank there's not like any necessity for the receiver to be necessarily on remotely exactly now i do get that someone could say okay well they're sending money back to that home country and then they might be sending it reversing that at some point but i think a lot of these are one-way transactions, at least for the time being. So the network effect might not be there. Where Wise is the same thing. I don't necessarily think they have a network effect either. And if they do,

Starting point is 00:38:38 it's pretty weak. Now, the next part is for financial projections. So I'm saying 20% revenue growth. Next part is margins. As outlined above, I think margins can move to 20% over time. That's what I targeted by 2030. There will be operating leverage on tech and overhead costs, and they will have more marketing as a nominal percentage, or excuse me, that doesn't make any sense. The nominal amount of marketing dollars will increase. I think marketing as a percentage of revenue may fall slightly, but it's important to them to have this marketing moat similar to booking that we've talked about. I still think 20% operating margin is pretty doable. And if revenue grows at 20% rate through 2030, operating margin grows to 20%, that would be basing it off

Starting point is 00:39:21 the last 12-month revenue, around $500 million in operating earnings. Today, Remitly has a market cap of $2.7 billion. We're only around 5.4 times my 2030 earnings estimates. And that is a note, there will be some SPC dilution. They do have that, but they will be cashflow positive. So I think any buyback or cash pileup on the balance sheet can negate that headwind. If you kind of know what I mean there, it'll balance out. And I had this chart posted in here, but it's not loading on the Google Drive, but I remember what it was. And it was the EV to gross profit. And I'll share the screen here. The EV to gross profit has fallen to 3.9. So I think that's another way to look at it and say, okay, well, EV to gross profit is 3.9. Gross profit can probably

Starting point is 00:40:10 grow at a pretty fast clip over the next five to 10 years if they can get operating leverage through that. The operating expenses can grow slower than gross profit. Well, that might be a recipe for some good earnings growth. Yeah, I'm looking here. Maybe I'll share my screen as well. The consensus estimates for free cash flow margins right now, it seems like analysts in consensus are estimating about 7% free cash flow margins by 2026. that's compared to you have earnings because they might have cash flow might be tough because of the business model i have i can do operating income it doesn't necessarily uh let's go operating income is expected to go from

Starting point is 00:41:00 negative 100 million over the last 12 months to analysts are projecting 91 million by 2026 That feels fine to me. And I think if that happens, people might say, well, yeah, $100 million. And today the market cap is $2.7 billion. But I think given the revenue potential and giving the potential for further operating margin expansion from there, that's where I see the opportunity. Yeah. And it's also, I don't know. I think it's worth taking the analyst estimates with a grain of salt here because, like us, it's hard to forecast this growth rate for a business that's growing this quickly.

Starting point is 00:41:43 It's really hard to know, A, what the top line will look like, and B, how much that will flow through to the bottom line. So, yeah, probably worth kind of formulating your own assumptions here. Do you want to talk, I guess, a little bit about the balance sheet? Is there any concerns here? yeah i should just make a quick note 185 million dollars in cash 342 million dollars in total liabilities most are customer liabilities for payouts so something that's just going to grow with the business and it's just part of the business model and then they also have like customer receivables and stuff like that like a remittance business might have um nothing out

Starting point is 00:42:17 of the ordinary i like it keep it simple keep it clean very boring balance sheet a lot of debt nothing to really care about too much obviously that can change they can make a decision to change that, but today, not so much. Now, I look at this and I look at my projections and I say, if these are right, or do you have a follow-up on the balance sheet, Ryan? Yeah, I was just going to say, I'm looking at the numbers right now. March 2022, they had $445 million in cash and equivalents. Today, they have $185 million. So they've burned through about half of their cash pile over the last two years. As we said, they got a ton of cash from the ipo so uh they're using that and in the meantime they've improved their cash flow

Starting point is 00:42:59 margins to roughly break even at this point so it's looks like they've been very efficient uh and kind of gotten to the place they want to be i would suspect their cash balance starts to grow or stays relatively flat from here yep exactly and that's why the buyback will probably come in in the spc stuff you know something to watch out for but now that's something i'm hugely concerned about but yeah if i look at the estimates that i have and if i if the estimates prove correct or are exceeded i think this is probably a 3x or 5x return over the next five years now my discussion question is should i have confidence in these estimates ryan what are your thoughts and maybe that'll we'll answer this further when we get to the

Starting point is 00:43:45 competitive advantage section at the end um confidence i think you can level one to ten you're not allowed to choose seven uh i'd probably go with a five i think it's really kind of a crapshoot trying to estimate top line growth for businesses like this you know it's probably going to be solid because they have a lot of momentum but to do it with any sort of accuracy is very very difficult so i it's not like an o'reilly where you know the number of cars on the road is going to grow one percent each year and you can probably guess the growth rate within one to two percentage points it's going to be quite uh it's going to vary quite widely would be my guess okay what let me rephrase the question confidence level on double digit

Starting point is 00:44:37 revenue growth. I would probably be not allowed to say seven. I would probably say eight. Yeah. Eight and a half, honestly. I'd be pretty confident. They have a lot of momentum in this business. And I think if it's... I'd be curious to see some churn figures because I think once you're on remotely, I would be very surprised if you start looking elsewhere. Finchat.io is the complete stock research platform for fundamental investors. They have all the standard financial data on more than 100,000 stocks globally. But beyond that, they have company-specific segment and KPI data on 1,800 stocks. Want to see NVIDIA's data center

Starting point is 00:45:16 revenue? FinChat's got it. Like to track Spotify's premium subscribers? They've got that too. And they just added ETFs to the platform as well. The breadth of FinChat's data is truly one of a kind. We use FinChat every day, and I've personally been using the AI co-pilot more and more to summarize earnings calls, and conference transcripts. To get 15% off any paid plan, go to finchat.io slash chitchat. That is finchat.io slash chitchat. To get 15% off any paid plan today, the link is in the show notes. Yeah, they don't talk about that that much, but that is something maybe an analyst should ask. Hey, if you're an analyst listening to this, I asked them that question. All right. One more topic I want to hit. And this is just two segments that helped me be optimistic about Remitly's durable growth over the long term. One can drive, I think, material growth over the next five years and also longer. But one is more of their, say, decade long product goals, business goals, stuff like that.

Starting point is 00:46:22 So first is revenue outside of North America. So this is revenue from corridors that do not include North America, which would be Canada and the United States. So an example would be the United Kingdom to Kenya, just as an example. This segment has grown revenue at 109% year over year since 2019, and now it's $242 million in revenue. So we went from basically nothing in 2019 to $242 million over the last 12 months. I think that's impressive and that can keep going and they can repeat their marketing muscle. Similar, I don't want to just make these OTA comparisons forever, but similar to Airbnb, where they have their core markets, but now they focus on places like Brazil or South Korea, and tried to replicate and localize the marketing to help that work.

Starting point is 00:47:09 The second one I want to talk about is Remitly Circle. So this is a product that's pretty much still in development and maybe call it a beta product, but it might come out in a year or two, maybe even longer. And instead of just the send with Remitly, Remitly Circle will allow customers and I don't know the details of this, but it's going to allow them to save, send and spend money internationally in a global account. Sounds like a wise account to me. Remember, though, that the VAM diagram of Wise and Remitly customers is thinner than you think. So don't think they will necessarily be looking to steal customers from someone like Wise. I think it is an upsell to the existing customers, which if you look at the people that send money back, there's a lot of

Starting point is 00:47:58 other things that, as people do financially, that send money back to, say, India, Mexico, other places. And if you are living in an emerging market with currency woes, why not park some cash in a different currency and earn a safe yield? That's just one example use case I have here for remotely circle. And is that going to be relevant to the financials anytime soon? No, but I think it shows the product roadmap and that they're a little bit more ambitious than just being a remittance provider. Who do you think they have stolen share from? Who would you call their primary competitors? Western Union. I don't have any of the charts here. I probably should put one in the sub stack. Western Union's KPIs have been stagnating for a long time. They're also stealing

Starting point is 00:48:44 money from i think paypal and i also think they're stealing or sorry stealing customers from paypal i also think they're stealing money from banks who all charge a lot paypal owns zoom which is spelled x oom really bad name but i think that's where they're stealing money from do you think remitly has a moat i think remitly has a weak moat but a chance to expand it to a wide mode over the next 10 to 20 years so with that being the case i mean like i don't have extremely high confidence that remitly can hit or exceed my growth projections or financial projections but if they get keep the momentum going i think the predictability

Starting point is 00:49:34 of the business will continue to increase because if a competitive advantage is growing, it grows the durability of the business. And if it grows the durability of the business, it grows the predictability of the earnings. And for me, that's very important as a potential investor. So where does it obtain this moat? I think it's really through economies of scale and the regulatory stuff. And as we talked about, there's all the things you have to set up in each country. There are all the partnerships, the connections, the corridors. Now, some people describe that as regulatory stuff. Some people describe that as network effect, but I would really just put it into economies of scale. It's hard to build this instantly and then create the

Starting point is 00:50:11 same customer experience over time. I'll say it again. No one that sends money from the US to India cares if you open a corridor from US to Guana in South America, but there's a lot of value in growing the total amount of payout methods, the total amount of uploading methods. There is also a barrier to entry from the regulations in all these countries. It is a slow process. Similar to Wise, Remitly is one of, if not the only other large digital first player to obtain this level of maybe this customer value proposition for all these customers. Now, I think they can attain economies of scale through a marketing advantage a little

Starting point is 00:50:50 bit, but also just generally the scale that we talked about where if they get to 5%, 10% market share and global remittances, they will have the gross profit firepower to maintain a high level of marketing spend and crowd out competitors trying to tackle them from any other startup or any other niche while also having positive bottom line profitability. And then when competing with legacy institutions such as banks or Western Union, I think the innovator's dilemma is at its side or on its side. I highly doubt these players will be able to replicate the seamless experience when using Remitly on a smartphone, add everything together. And I think Remitly has a small competitive advantage, one that is growing and one with

Starting point is 00:51:30 the potential to grow with a long runway to gain market share over the next 10, 20 years. Yeah, I'm going to try to create a chart here just to compare the consumer to consumer transactions growth versus the two. But in the meantime, I guess, give us the conclusion. are you buying shares in remitly or is it going on the watch list i will be buying shares of remitly i think we'll just keep the standard disclosure things we do when this podcast comes out on wednesday i'll wait probably a little while a couple days maybe till the next week until i buy shares but i will be buying shares i think the stock is cheap i trust management and i think the company has a growing competitive advantage all three boxes that i look

Starting point is 00:52:15 for get checked. I think the upside over the next 10 years is that Remitly is a 10-bagger. I think that is a possibility here. With new projects such as Remitly Circle trying to expand beyond just remittances, there's potential for this to be a huge financial services company over the long haul. Although I don't think we need that to succeed, that could add a bit of a cherry on top. At $1 billion in revenue today, which is likely going to be $1.5 billion soon, I think we are generally protected to the downside at today's market cap, given the reliability of existing customers in unit economics that could be printing a good amount of profits if they stopped reinvesting into marketing. Now, of course, of course, people are probably rolling

Starting point is 00:52:51 their eyes and saying, yeah, the stock, you know, it's an unprofitable company. The stock could definitely fall 50% in the next year. I agree. Totally could. But over the long term, I think the value of the stock is protected by these existing customers. And I'm pretty confident that they can retain these existing customers. Growth can come from acquiring millions more of the next few years. I think high upside protected downside for someone who has a three to five year time horizon. Now I know it's funny for a company with negative margins, but I really, really had confidence in the value and predictability of remittance customers. This is a, like at the end of the day, the business model is not something that's radically different. So saying that they

Starting point is 00:53:38 you get 20% operating margins. It's not some giant stretch. All right. What chart do you have first, Ryan? This is Western Union versus Remitley's North America versus United States revenue. So it's- Similar, yeah. Somewhat similar. Over the last five years, Remitley's United States revenue is up 575% and Western Unions is down roughly 20%. So certainly been the market share taker here. Yeah, and you know what? Western Union probably still has more revenue,

Starting point is 00:54:13 so there's a lot of runway. That's what I think. So that's why I'm buying. Well, let me. Nominally? Yeah, it's kind of converging here. Look at that. That's beautiful right there.

Starting point is 00:54:24 There you go. Yep, certainly going the right direction for Remitly. Yeah. Yeah. And I see no reason why this will change radically soon. Now, let me close out with risk I'm watching and why I would sell. I think there's two big risks to watch. One is I worry a bit about the high current fees masking a risk over the long term from competitors. You know, one thing I like about Wise more than Remitly is that they have a stated goal of bringing fees down. This creates a barrier to entry because over time, I hope Remitly does the same or risk losing customers

Starting point is 00:54:53 to someone like PayPal or Wise when everything becomes digital to digital. Second one I worry about is something like a Visa Direct or whatever MasterCard has that is the equivalent for the product or a central bank digital currency. I know crypto is not really a serious sector anymore, but people talked about those type of risks too. I get confused on exactly what Visa Direct is, but it says on its website that it is helping transform global money movement and Visa talks about it growing very quickly. So essentially, I think it utilizes the Visa network and all its endpoints to help banks enable their customers to send money well that's you know that's that's a competition with remitley now it has partners such as addy interbank of america and i think

Starting point is 00:55:38 it's a potential risk to remitley over the long term because it could level the playing field potentially there's a long way to go here and maybe even remitley is a user of the visa direct network but it's something to watch out for this market has a lot of moving parts there are a lot of different players. And someone like Visa, who is an integral part of another part of the payment space, could try to step on their toes. Yeah. Here's something I like about Remitly. It is very clear what you get. Even in the name, if you're just thinking of a place to send a remittance, Remitly kind of comes to mind. Visa Direct, I think is going to be a nightmare for consumer adoption if that's who they're targeting well they're like the backbone for they'll be the

Starting point is 00:56:26 banks bank to bank yeah okay and it's solely for remittances uh no it's it's essentially allowing people to send money in a quicker method say it's really hard to describe and i don't think i understand it fully but maybe from different bank accounts stuff like that almost like ach almost like peer-to-peer, almost like a FedNow, which I guess that type of stuff could be a competitor to Remitly over the long term if it goes cross-border. But I don't think we're going to have one global country anytime soon. I think each country is going to continue to be different and there will be frictions that companies like Remitly and Wise need to solve. The biggest risk for me, I think, is that they don't have positive operating margins right now. The business is

Starting point is 00:57:12 unprofitable. And I think it's clear that they can get to positive profitability, but if they don't, it's going to show them wrong. And I think they need to show progress, not every quarter, but over the next couple of years, probably every year. If they don't, it will be a concern. I'm probably wrong about the unit economics and I'll probably need to sell. That's really it. That's for Mitley. And as a reminder, Brett and I follow some personal trading guidelines, which is just simply don't buy or sell, I guess, basically within a week of talking about a stock on the podcast so when we say we're buying that is not financial recommendation in any way so a little bit of a disclosure there but purely for brett's personal account this is a fun one do

Starting point is 00:57:56 you have any company in mind for your next research report so i was going to do rocket lab but i think we're going to bring on someone that knows the company better as an interview to discuss them which i think will be fun what do you think about there's some of these retailers out there like lululemon seems so fascinating but it's like okay well people kind of get that is that going to be something special i don't know do you have any ideas for me i'm open to suggestions retailers could be fun ulta and lulu are kind of the two that come to mind for me um celsius maybe that could be a fun one because people kind of just do a lot of top level things like oh they're getting market share by it but there might be more under the hood

Starting point is 00:58:47 yeah i kind of like that one maybe celsius all right well i think that's going to wrap it up for us as always we have our sub stack which is totally free so if you want to check that out We put all the charts that we discussed on today's show in our Substack write-ups and Brett will have that out, I believe, within the same day as the podcast drops, if I'm not mistaken. That is correct. Same day as the podcast drops. Typically, I try to do that.

Starting point is 00:59:15 Sometimes it's a day late. So by the time you're listening to this, the article is probably out. Feel free to look it up, Chit Chat Stock Substack. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Stocks is not formal advice or a recommendation. We may buy, sell, or hold any securities discussed on this podcast. Thank you all for tuning in, and we'll see you next time.

Chit Chat Stocks - Why I Am Buying This Hidden Fintech Stock (Remitly, Ticker: RELY)

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