RELY - Remitly Stock: Customer Acquisition Trends Keep Us Bullish

2023-05-22 16:33:15 ET

Summary

• Remitly reported Q1 earnings which beat expectations amid strong growth momentum.
• The company is benefiting from its expanding scale, set to drive margins and profitability higher.
• Impressive customer growth and high user retention support a positive long-term outlook.

Remitly Global, Inc. ( RELY ) has emerged as a major player in international remittances, specializing in family and immigrant cross-currency transfers. The company has benefited from its "digital-first" platform amid the global theme in this segment of consumers shifting away from traditional hard cash exchanges.

Indeed, Remitly now counts on more than 4.6 million active customers, up 50% over the past year. That operating momentum with a path to profitability is a big reason shares of RELY have doubled over the past year.

We're bullish on RELY and see the stock climbing higher. Following a string of strong quarterly results, firming margins and improving earnings support a positive long-term outlook for the stock.

RELY Earnings Recap

RELY reported Q1 earnings highlighted by revenue reaching $204 million, up 49.9% year over year. Financially, the story has been the ongoing investment effort to support the rapidly-expanding business. Q1 EPS of -$0.16, representing a net loss of -$28.3 million, came in slightly ahead of the consensus estimate. Adjusted EBITDA turned positive to $5.4 million, reversing a loss of -$12.1 million in the period last year.

Management emphasized several factors driving growth including new customer signups, high retention among existing customers, as well as launching in new countries.

The metric that stands out to us in terms of improving financial efficiency is the marketing expense as a percentage of revenue declining to 20%, compared to 29% in Q1 2022. Similarly, the transaction expense has leveled off in recent quarters reflecting the scale benefits from the top-line strength. These trends are expected to support profitability going forward.

Favorably, the full-year guidance was hiked with Remitly now expecting between $875 and $895 million in revenue, up from a prior midpoint estimate of $870 million announced back in February. The company now sees a 2023 adjusted EBITDA between $5 million and $15 million, compared to the previous expectation closer to breakeven.

Overall, management projected optimism during the earnings conference call, reiterating a longer-term goal of consistently generating "double-digit" growth and further efforts to drive down transaction expenses. The strong balance sheet position, ending the quarter with a net cash position above $240 million, provides the financial flexibility necessary in our opinion.

What's Next for RELY

There's a lot to like about Remitly which has managed to build a platform generating brand loyalty. The sense here is that while the remittances market has some large peers like The Western Union Company ( WU ), MoneyGram International ( MGI ), or International Money Express, Inc. ( IMXI ), the segment remains fragmented globally and in key markets which is allowing Remitly to consolidate its position.

According to the World Bank , the global remittances market is expected to grow at an average annual rate of 6% by 2027. This momentum has been fueled by the rising number of migrants globally, coupled with the adoption of digital channels like mobile devices adding to convenience and affordability.

We see Remitly as well positioned to continue gaining market share with users drawn to its low-cost model and reputation of dependable service. That disruptive aspect of Remitly is evident when looking at its current growth rate compared to Western Union posting declining sales over the past year while MoneyGram is just in the single digits.

In terms of valuation, RELY is currently trading at a forward P/E of 331x considering the consensus expectation of earnings turning positive and reaching $0.06 per share this year. At the same time, the multiple begins to normalize looking out over the next few years with a forecasted EPS acceleration to $0.19 by 2024, and $0.35 by 2025.

Our analysis here is that while it's fair to consider RELY as pricey, there's also a good case to be made that the premium is justified given the organic growth trends. The bullish case for the stock would consider some upside to the EPS estimates as margins benefit from declining transaction expenses and lower customer acquisition costs.

RELY Stock Price Forecast

We're bullish on RELY and see the stock ultimately moving higher by this time next year. The market should continue to reward RELY for its impressive operating trends and financial momentum, with overall solid fundamentals supporting a positive long-term outlook.

Our only hesitation here in recommending the stock more strongly comes from acknowledging what has already been a breathtaking 150% rally from the stock's 2022 low. It's been nearly a straight line higher thus far in 2023 and some caution ahead of a possible pullback makes sense.

The main risk to consider would be a scenario of a deeper deterioration of the macro environment where a global recession would undermine the growth outlook for the broader remittances market. Weaker-than-expected results over the next few quarters could also open the door for a deeper selloff.

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