On first encounter, we were positively impressed by Xoom ( XOOM ). Here was a
company using technology to provide an improved solution in the
arcane world of international funds transfer. We liked the stock so
much that we wrote it up here and put it in our IPO Candy Folio. Shortly
after the IPO, we found the service frustratingly hard to use and
began to dig around and wonder more about the real asset here.
XOOM isn't a fraud. Wanting to stick with alliteration, we would
go with filou which is more of a kind of "swindling knave". XOOM
reported quarterly results Monday night that were ahead of
consensus and management reiterated their strong guidance for the
current fiscal year.
From a profit point of view, however, investors will have to be
patient. Although gross margins are attractive (60+%), marketing
and operating costs are high now as a percentage of revenue. So the
company will continue to have operating losses for at least the
rest of this FY.
Our note below goes into more detail about our specific (and
admittedly anecdotal) experience, but the core of our concern is
that the company is 1) relying on heavy marketing and promotion
rather than offering a high quality of service and 2) their "risk
management" is actually focused on managing customer profitability
by encouraging those who do many small transfers (high margin).
This is a little like having ATM machines that will only dispense
$20-30 at a time which makes the $3 usage fee very high in
There is also some strong evidence that our experience was not
isolated and that the company (or someone with a vested interest in
the company) has probably paid for false reviews of their service
on some consumer review platforms. It's not clear if that is
illegal, but it's at least misleading and conditioning the market.
We provide examples from this site below and readers can refer to
reviewcentre.com to see for themselves.
Generally speaking, investors and analysts like XOOM. The 3
analysts covering it have "buy" ratings and price targets of $27 to
$29 as we go to press. History also suggests that as long as XOOM
keeps growing and stays legal, they will get acquired by a large
financial institution. Many big banks and financial services firms
struggle with organic growth, so acquisitions of companies like
XOOM are perfect for them.
(click to enlarge)
XOOM is currently trading at about 8x sales which is at the very
upper end of the valuation range in this industry. Only Visa ( V ) and MasterCard ( MA ) trade that high.
For comparison, American Express ( AXP ) trades at 2x,
Green Dot ( GDOT )
at 1x, Western Union (WU) at 1.4x and MoneyGram International (MGI)
Due to our concerns we are dismissing our prior IV model.
Falling back to more conventional levels, we'll point to an
arbitrary but still high valuation metric. The company is forecast
to be profitable for the year 2015. If we put a 2x multiple on that
figure ($167M), we get to a $5 share price. That's not a
prediction, just an illustration of risk. You'd have to believe
that 8x sales is the right figure at the current price and that
seems like a stretch given what we know.
Good looking but dysfunctional service
The CEO of XOOM, John Kunze, is actually a software guy
(Plumtree Software, Adobe), so that may explain why the system
looked and behaved so much better than anything else we've seen in
the space. In fact the XOOM front end software was just as
excellent in use as it was in appearance so we were ready to be
What happened next stood in stark contrast to the impressive
look and feel of the software. We'll get to some more market data
in a moment, but the first red flag on this story came from our
personal experience so here goes:
Strike One: I decided to try the service to send $500 from my US
bank to a friend in France with an account at a major bank there
(Societe Generale), and it got declined. That's okay, it happens,
I'm a new user, so no problem. The email is a bit cryptic however
(which stands in stark contrast to their very well put together
client software and web interface) and suggests that I can
challenge the decision and I do.
Strike Two: Another similar email arrives asking me to call a
customer service number to provide more information to get my
transaction approved. Now it gets weird… I call the number and
after pressing the appropriate menu key, a person answers the
phone, but they don't say anything and after a few seconds of
background noise hang up the phone.
Strike Three: I'm still holding out some hope that the
organization to which I have just given detailed bank information
for not one but two accounts is going to answer the phone. So I
call a few more times. In these cases the line just cuts off
without any background noise. In a few hours I give up.
At this point, I decide to move on to other things and continue
to rely on my existing methods for moving money.
We've all had bad customer service experiences so the story
could end there. What's different here is that this company has
bank information. It's not that easy to delete your account either.
You can login and delete a good amount of personal information, but
there is no "expunge all data" button.
So is my case unique or is this a pattern?
This is where the online data gets a bit suspicious. If you
google "XOOM review" you will fall on a site which has over 5,000
positive reviews of the service. Having seen some "review jobs" in
the past, particularly on services like iTunes, these looked like
they fit the pattern. Lots of enthusiasm and exclamation
Yeah but maybe XOOM is just that amazing?! Over 5,000 people
taking the time to rave about this online funds transfer service.
And they all managed to find this obscure site (reviewcentre.com)
to trumpet their experience. The only negative reviews I could find
were for other services which said "use XOOM instead." These are
things that make you go "hmm."
(click to enlarge)
Time for a little more digging. Another site that seems more
customer focused ( consumeraffairs.com ) told a very different
story. There the overwhelming majority (95%) of the 39 ratings were
negative. Many echoed my own bad experience with a bit more
frustration. In fact many of the experiences described were quite a
bit worse than mine and seemed to suggest that XOOM takes broad
liberties with their claims and may not even have a system for
monitoring customer satisfaction and service.
How fixable is this?
Looking more closely at the company's management team, it would
appear that customer care and operations are simply not deeply
seated in the XOOM DNA. XOOM is first and foremost a technology
company. The head of "Customer Operations," Frank Walter, has only
been with the company for 3 years (versus 6 to 8 years for the core
senior team) and hails from AT&T, Good Technology and VCA
Entech/Eklin Medical Systems. It wouldn't be fair to lay all the
customer service issues at Frank's feet, but he's at least the
point person in terms of the phones not being answered and many
complaints going unaddressed.
Many rapidly growing companies run into customer service issues.
We remember Sybase in the early days when their business was taking
off. They just couldn't get to all the incoming calls or hire fast
enough to support their customers. Eventually they "caught up" and
took care of customers. eBay had similar issues years ago and got
XOOM management can rightfully say that so far their results are
"just fine" and that these issues are not material. But we'd argue
that the high cost of sales and needing to bribe current customers
with gift certificates to refer friends are ways that current
investors are suffering from lower-than-necessary returns.
Longer-term if these issues are not addressed, it will make it
easier for competitors like Western Union to offer a matching
service whenever they feel the market is large enough to enter.
Had the service worked as advertised, I would have had dozens of
my friends using it with near-zero marketing help from XOOM. That's
how great new products spread. But this isn't that, at least not at
this point. If the management team gets "customer religion" then
investors should be encouraged. Until then this is one to be
Most institutions we have talked to have noted that the stock
"is expensive," so we should expect to see some additional
distribution when the lockup agreements expire on or about August
We know all too well than anytime you publish anything that
isn't basically positive, there is an energetic reaction from those
that own the stock/disagree with you. There is almost always an
element of "vested interest" or "axe to grind" in the replies.
So it may be helpful to know that we have absolutely no
investment interest in XOOM (long or short) nor in any of their
competitors or related stocks. We haven't done any business with
XOOM or any company in the online payment processing space.
The only fairly distant related business transaction we have is
some ongoing advisory work in secure authentication which has
little or nothing to do with XOOM.
Disclosure: I have no positions in any stocks
mentioned, and no plans to initiate any positions within the next
72 hours. I wrote this article myself, and it expresses my own
opinions. I am not receiving compensation for it (other than from
Seeking Alpha). I have no business relationship with any company
whose stock is mentioned in this article.
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