Remitly Global Stock: Time To Get Upbeat (NASDAQ:RELY)

In September of last year, I concluded that Remitly Global (NASDAQ:RELY) was transferring wealth. The company helps migrants to send money home more effectively, securely and cheaply.

The market is ripe for disruption, yet despite the strong growth and reasonable relative sales multiple (at the time), I was leaning cautious with some risk on the horizon as well.

Back To Last Year

Remitly aims to improve the lives of immigrants and their families by providing trusted financial services. The company has been around for a decade, trying to aid a huge market with half the world’s population living on less than $5 a day.

Remittal of money is complicated as it includes conversion of currencies, making the process of sending money hard, complex, error-prone, but most of all very expensive. All of this comes amidst a huge market, with the remittal market pegged at $1.5 trillion.

Remitly used technology to disrupt this industry through its application on which customers can send money with a few taps on the application. This is important as many consumers do not have a bank account, yet they do tend to have mobile phones. While the technology of sending money has changed the business model has not, with charges applied to transactions and currency spreads (albeit far lower). At the time of the IPO last year, the company has facilitated $16 billion in payments on a trailing basis, about a percent of the addressable market.

The company went public at $43 per share as the 161 million shares outstanding valued the company at around $7 billion, or about $6.5 billion if we factor in (pro forma) net cash. This was a very substantial amount for a company which generated $126 million in sales in 2019 on which it reported an operating loss of $50 million. Revenues doubled to $257 million in 2020, with losses coming down to $29 million.

Revenues were up 92% in the first half of 2021 to $202 million, for a run rate of $400 million. Operating losses for that time period narrowed to $10 million, marking continued progress, but nonetheless, the company traded at around 16 times annualised sales. Some 2.4 million users used the application to send $9.2 billion in payments in the first half of 2021, indicating that the revenue run rate is equal to just over 2% of the processed volumes, a modest amount.

The 100% growth rates amidst a 16 times sales multiple looks relatively compelling if we compare to it PayPal (PYPL), which traded at 12 times profitable sales while growth comes in around 20%. Nonetheless, I did not get involve with the shares just yet amidst somewhat slower growth in the second quarter and these were of course relative multiples, not absolute multiples.

That Went Fast

Since shares traded around the $40 mark in September of last year, it quickly went downhill. Shares fell to the $20 mark by year-end 2021 and after hitting a low of $6 and change in May, shares have now recovered to $10 and change.

In November of last year, Remitly posted third quarter results with revenue growth slowing down to 69% to $121 million on the back of a 61% increase in volumes. The company posted an operating loss of $12 million and change, driven by stock-based compensation in relation to the public offering, but also some deleveraging as it appears. Fourth quarter revenue grew by similar percentages to $135 million, yet operating losses increase to $16 million and change, only in part the result of an $8 million quarterly stock-based compensation expense.

The outlook for 2022 was a bit mixed with revenues seen up 32-34% to $605-$615 million yet adjusted EBITDA losses were seen between $30-$40 million, which actually compares to a fourth quarter loss of $7 million, indicating that the losses will not come down this year.

When the company posted first quarter results in May, and shares fell to their lows, as the results were obviously a mixed bag. Revenues rose 49% to $136 million, yet operating losses increased to $23 million on the back of a $12 million EBITDA loss. The company only raised the midpoint of the sales guidance by five million, leaving the EBITDA guidance unchanged.

Second quarter results were a bit better. While growth slowed down to 42%, this growth is largely seen in line with send volumes now (indicating that the company is no longer increasing its cut of the processed volume). The $157 million revenue number is solid, yet operating losses increased to $39 million, yet EBITDA losses narrowed to $5 million as stock based compensation ballooned to $32 million, raising some real questions here. While the company improved the full year guidance, it now sees sales at $625-$630 million, and EBITDA losses now seen at $30-$35 million, yet the issue is that elevated stock-based compensation expenses result in big realistic losses.

By now the 166 million shares trade at $10 and change, essentially resulting in a $1.7 billion valuation which includes a $430 million net cash position, indicating that operating asset trade at around $1.3 billion. This values the operations at just 2 times sales here, yet realistic losses are substantial at $50-$100 million, depending on how large we peg the stock-based compensation run rate.

A Small Deal

In August, Remitly announced a deal to acquire Rewire, an Israel-based firm in an $80 million deal comprised out of cash and stock. With offices in Tel Aviv and Amsterdam, the operations and services are complementary to Remitly’s operations, yet the company has not indicated how many customers, revenues, or payment volumes are added as a result of the transaction. All in all, this is a relatively bolt-on deal, equal to about 6% of the current market valuation of Remitly.

And Now?

The tricky thing is of course the fact that shares are down 75% which, given the net cash position, makes that the operating asset valuation has come down even more. Revenue growth slowed down from 100% to 50% which does not come unexpected and is not a major issue. The problem is certainly not a 2 sales multiples with 50% revenue growth, yet the issue is that losses have increased a bit, on the back of stock-based compensation (which was really elevated in the second quarter), but outside these expenses losses were up as well.

With more than $400 million in the bank, there is sufficient room to pay for these losses, so we have no intermediate threat here, yet the situation is far from ideal of course. Truth is that it likely is time to get upbeat, yet some real operating leverage is needed to ignite some enthusiasm into the shares here, although some opportunistic position here might be warranted.