The tech sector of the stock market went nuts in 2020 and 2021. With the proliferation of Special Purpose Acquisition Vehicles (SPACs) and traditional initial public offerings (IPOs), there has been a record number of new listings (estimated at over 1,000). the US stock market over the past calendar year. In 2022, that excitement has turned 180 degrees as very few stocks have gone public in recent quarters amid geopolitical tensions and falling stock prices.
Many IPOs from 2021 have fallen sharply in 2022, presenting a buying opportunity for long-term investors. Here’s why estate (TRUST -0.19%)a stock that went public in late 2021 is my top tech IPO to buy in December.
Remitly: remittances for the digital age
Remitly is a financial service provider for immigrants and their families. More specifically, it offers international money transfers (so-called remittances) through its mobile application so that immigrants can easily send money back to their home countries. For example, one of the most popular routes for migrant workers is from the United States to Mexico.
Unlike traditional money transfer systems, Remitly is a digital-first offering, making it possible to reduce transfer fees compared to incumbent providers. This gives it a competitive edge and is the reason hundreds of thousands of customers switch to the platform every year.
Strong Q3 results
In the third quarter of 2022, Remitly’s active customers grew 49% year over year to 3.9 million. Payment volume through its platform grew at a slightly slower pace, by 44% to $7.5 billion. And as Remitly continues to lower its fees for customers, revenue growth lagged payment volume, rising 40% year over year. Still, 40% growth is nothing to scoff at, especially at a time of macroeconomic uncertainty and exchange rates that are subject to tremendous volatility, which can impact a remittance business like Remitly.
With those strong results, the company raised its full-year revenue guidance to $635 million to $640 million, or a 38% to 40% growth rate. If the company can meet its full-year guidance, revenue will have grown at a compound annual growth rate (CAGR) of over 70% from 2019 to 2022, making Remitly one of the fastest growing companies in the world. To underscore what this rapid growth means, Remitly generated $126.6 million in revenue in 2019, down far from the $169.3 million it reported last quarter.
And there’s no reason to think this rapid revenue growth won’t continue. Customers are signing up at a strong pace, and with an estimated 150+ million migrant workers around the world, Remitly has a clear path to reaching 10 million or more active customers this decade.
If you squint, the rating isn’t that crazy
As of this writing, Remitly’s stock is down 75% since its IPO and now sits at a $1.8 billion market cap. The company is not profitable and posted a net loss of $111 million in the last 12 months. However, with an asset-light model, Remitly has a strong unit economics and gross margins of 49%. Once the business matures and management stops spending as much on sales and marketing (27.6% of revenue in the first nine months of 2022), it’s easy to see how Remitly could generate strong double-digit profit margins.
Contrary to intuition, investors should be cheering the continuation of these losses right now. With $376 million in cash on its balance sheet, Remitly has plenty of room to step on the gas and lose money as revenue grows rapidly. If Remitly can grow sales by 40% per year in a couple of years, it will hit $1.75 billion in three years. Assuming it can deliver a 15% net income margin, that translates to net income of $263 million, or a price-to-earnings multiple of 6.9 based on today’s stock price.
So if you think Remitly can continue to grow sales at this level and increase its profitability over time, the stock is arguably trading at a discount today.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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