Xoom Builds Competitive Edge In Online Money Transfers
Let's say you're thousands of miles from home, in a country that doesn't speak your language and doesn't much care that you blew all your cash and credit at the casino and can't pay your hotel bill.
In the old days, you might be stuck scrubbing the hotel's bathrooms for a week or more until you could get money wired from back home.
In 2013, you can get your cash in a matter of minutes, using the services of firms that specialize in online, person-to-person money transfers.
One of those outfits,Xoom ( XOOM ), allows customers to make online money transfers from the U.S to foreign countries. It was founded in 2001 and went public in February, making it a mere pup compared to much larger, more established rivals such asWestern Union ( WU ) andMoneyGram International ( MGI ).
Still, Xoom has built a growing business providing person-to-person online money transfer services through its own xoom.com site as well as another website, walmart.xoom.com, that was established through a 2011 partnership between Xoom and discount retail giantWalmart ( WMT ).
Making Money On Money
Xoom charges fees to send money and also earns a foreign exchange spread on the amount sent.
At midyear, the company boasted more than 915,000 active customers and provided services in 30 countries on six continents. Its sales through the first two quarters of 2013 were up more than 50% from the prior year, and it is expected to post its first annual profit this year.
Customers can make transfers using their bank accounts, credit cards or debit cards. Unlike some rivals, Xoom doesn't let customers transfer money between states or from foreign countries to the U.S.
Though Xoom only allows transfers that start in the U.S., CEO John Kunze told IBD in an interview earlier this year that there is still plenty of business. (The company currently is in a quiet period prior to its Q3 earnings announcement scheduled for the week of Oct. 21-25.)
"The market we're operating in includes about an $82 billion opportunity," Kunze said. "Last year, we processed $3.2 billion, so we have only 4% market share -- and a long way to go to build a very big company."
Much of Xoom's business comes from U.S. immigrants who want to send money to family back home.
In a report, Raymond James analyst Wayne Johnson said that more than 70% of Xoom's revenue comes from three countries: the Philippines, which accounts for about 35%; India, at about 25%; and Mexico, at about 14%.
One of Xoom's advantages over rivals is its "expedient remittance times," Johnson said. Customers can send money directly to a recipient's bank account within a few minutes of the initial transaction.
Competition will likely increase in coming quarters as more companies try to grab a piece of the market for online global money transfers, analysts say.
Future Of Funding
In addition to legacy players such as Western Union and MoneyGram, competition might come from banks, regional players and payment companies such aseBay 's ( EBAY ) PayPal.
The fact that Xoom is already entrenched in the market should give it a competitive boost, analysts say.
"While we see risk for increased competition, we believe Xoom has established a strong brand in the online market, and the barriers to entry are high," Mayank Tandon, analyst at Needham, wrote in a note after Xoom's Q2 earnings report.
Legacy players face "many challenges" as they try to grow their online business without disrupting their core cash-to-cash offline businesses, Tandon added. He points out that Western Union and MoneyGram get only 4% and 5% of their revenue, respectively, from the online channel.
At the same time, both of those companies have a lot more financial might behind them than Xoom. Western Union had nearly $5.7 billion in revenue last year, while MoneyGram posted $1.3 billion.
In contrast, Xoom generated $80 million in 2012 revenue. As recently as 2009 it had less than $30 million. But the company has been growing rapidly, with 38%-or-better sales gains in each of the last nine quarters.
Second-quarter revenue rose 59% from the prior year to $33.5 million, topping consensus views for $26.4 million.
"While all the key regions performed ahead of plan, the India business, boosted by the almost 10% depreciation of the rupee vs. the dollar, drove the majority of the upside," Tandon noted.
Second-quarter earnings came in at 14 cents a share. That was well above views for a 7-cent loss as Xoom delivered much better-than-expected margins.
Analysts expect Xoom to post losses during the third and fourth quarters, though it should still log a full-year profit of 12 cents a share. Earnings are seen climbing to 17 cents a share in 2014 and 35 cents in 2015.
Xoom's stock price debuted at $16 on Feb. 15. Shares peaked at 36.46 on July 29. They tailed off some after that, partly because of market concerns over a secondary offering of 4.4 billion shares in early September. The stock fell as low as 26.34 on Aug. 30, but has since rebounded and currently trades near 32.