Think of companies that changed their industries with disruptive
technology. Certainly Apple,
(NFLX) immediately come to mind. And there are hundreds of tech
entrepreneurs and their VC backers hoping they are running the next
A few smart people believe
(XOOM) is a classic disrupter in the electronic money transfer
business, ready to steal market share from
(WU). Xoom provides payment services which consist of cash pickup,
bank deposits and home delivery, sending money online directly to
bank accounts and receiving money in local currency or US dollars.
The company offers services through xoom.com and walmart.com over
the Internet, mobile devices or tablet.
One those smart folks who likes XOOM is Mario Cibelli, founder of
the small cap investment firm Marathon Partners. His name has an
odd ring to it, doesn't it? In fact, Cibelli, who was featured in
the May 26 edition of Barron's, got his start in stock picking
after college with Mario Gabelli of Gamco Investors. More on
Cibelli in a moment.
Secure Payment Services Are Hot, Mobile is Hotter
Zacks Rank followers know this industry has been full of money with
highly ranked stocks like Heartland Payment and
Alliance Data Systems
(ADS) delivering doubling returns in the past 18-24 months. The
bigger companies like Alliance Data, and Visa of course, have the
enterprise business wrapped up where large-scale, robust technology
But newcomers like XOOM are able to carve niches appealing to
consumer tastes and preference for mobile, on-the-go transactions.
In May, analysts at Baird described the company...
"Xoom is a classic disrupter model online, with a faster, cheaper
and easier alternative to legacy money transfer companies. Xoom has
a strong and passionate management team, large addressable market,
and strong technology foundation."
Faster, cheaper, and easier sounds like a winning formula for
consumer engagement. But when does this value proposition turn this
stock's triple-digit P/E into a realistic growth story? It will
depend on management's execution of the their strategic plans,
especially in emerging markets.
Moving the World's Money
To see what Xoom is up against, it helps to understand the
evolution of the Goliath in their industry. Western Union has
annual revenues exceeding $5.5 billion, which coincidentally, is
the figure that Xoom claims as their total money transfers in 2013.
In continuing efforts to adapt beyond its brick-and-mortar model,
Western Union is increasing its investments in high-growth
electronic channels to build a world-class customer experience.
These efforts are propelling rapid growth in digital, account-based
money transfer, and mobile banking.
Online, westernunion.com money transfer transactions grew more than
40% in 2013, while transactions for electronic account-based money
transfer through banks surged over 50%. Management is targeting
$500 million in revenues from the digital business
(westernunion.com/mobile) by 2015, which implies a 60% CAGR revenue
growth through 2015.
Xoom has less than 10% market share in current markets, and has
barely scratched the surface of the money transfer market globally
even as they do business in 31 countries. According to Baird
analysts who recently met with management, the company is focused
on four primary growth drivers:
1) expand share in existing corridors (U.S. to
India/Philippines/Latin America), with the goal of reaching 50%+
2) add new markets from the U.S., most notably China, which would
add $20 billion to the Total Addressable Market (TAM)
3) add new origination markets, such as Canada, UK, Australia,
western Europe, doubling TAM
4) adjacent Services, such as Bill Pay (launching later this year)
and commercial services leveraging Xoom's instant transfer network
The analysts conclude that they believe it is reasonable to expect
Xoom to double its market share within 3-4 years, which suggests
roughly 25% revenue CAGR.
Follow the Money
This all sounds great. But I run a portfolio that "follows" the
real money moves of investment fund managers who do their homework.
That's why I was pleased to learn of Mr. Cibelli and his fondness
for Xoom as his number 2 holding, comprising 12% of his fund. From
the Barron's story...
"Cibelli's strategy is to find stocks he believes have the
potential to double in three to five years -- regardless of
economic or market conditions. He likes companies with disruptive,
usually Internet-based business models that have the potential to
And he has proven he knows how to pick these companies. He turned a
$10 per share purchase of a little disrupter called Netflix into a
ten-bagger between 2004 and 2011. And he bought it again around $75
in 2012 and cashed out last year over $200.
He is certainly not the largest holder of XOOM shares with less
than $300 million AUM. But he is committed. In Q1 he more than
doubled his stake from 400,000 shares to 860,000. Here is his
By 2017, he expects "pre-tax earnings of the debt-dependent company
will have risen to $80 million -- from less than $10 million this
year -- and XOOM will fetch 20 times pre-tax earnings."
I am also happy to report that the giant fund Capital World
Investors, with $360 billion AUM, just started a new position in
XOOM with the purchase of 3 million shares in Q1. Needless to say,
I am with Cibelli and Capital World and not least because I see the
appeal of XOOM as an acquisition target with its strong platform
and a sub-$1 billion market cap.
Disclosure: I own shares of XOOM for Zacks Follow the Money Trader.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
Follow The Money
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